The author of this article explains that the dollar is unstable and lawmakers should consider switching back to the gold standard as a way to get America out serious debt. The author continues to say that the Republican candidates have the ability to restore sound money and economic growth.
By LEWIS LEHRMAN, Special to the Sun
January 29, 2012
NY Sun
At a recent Presidential debate, the Republican candidates discussed a new Gold Commission much like the one to which President Reagan appointed Ron Paul and me in 1981. When asked, Jim Grant and I agreed to serve as co-chairmen of a new gold commission — proposed by Newt Gingrich if he were elected. Just weeks prior, Senator Paul was reported by the Weekly Standard as having called for just such a commission. We said at the time that we would serve on a gold commission established by any president seriously interested in monetary and Federal Reserve reform.
The next gold commission, however, must be different from the Reagan Gold Commission, the majority of which endorsed the managed paper dollar and floating exchange rates. As the two dissenting minority members of the 1981 commission Ron Paul and I filed a minority report. We called for the restoration of the gold standard — that is, a stable dollar defined by law as a certain weight of gold. The minority report, entitled “The Case for Gold,” was later republished in book form.
My views on monetary reform have not changed, except that my sense of urgency is even greater. The Constitution in Article I, Sections 8 and 10, makes clear that Congress has the full authority “to coin money” from gold to be the monetary standard of the United States. Since 1792, Congress by statute established a stable dollar, defined in law as a specific weight unit of gold, but a 1971 executive order effectively changed that.
Was the original constitutional dollar stable? The fact is that the purchasing power of the convertible or redeemable dollar over an 80-year period under the true gold standard was constant — from 1834 until 1914, save for the Civil War wherein the nation’s survival was at stake. This long term stability of the general price level and of a stable dollar redeemable in gold are necessary results of the simple mechanisms by which the gold standard operates spontaneously.
When the government or banks create excess money to finance deficits, people do not have to hold the excess money because they recognize the threat of inflation. A free people will demand redemption of the excess currency in gold in order to preserve the purchasing power of their wages and savings. But the banks and the government under the gold standard are required by law to maintain the convertibility of the currency when they are losing gold in the process of redeeming the currency.
Thus the banks and the government must reduce the quantity of money and credit in circulation to a level which people and firms in the market desire to hold. Since only undesired excess money causes excess demand for goods which causes inflation, the process of redemption of excess currency for gold extinguishes the excess currency. So stability returns to the general price level. The perennial stability of a dollar convertible to gold also is secured.
Over the long run, all working people want the purchasing power of their savings to remain stable in order to educate their children, to retire in modest comfort, to pass on a modest legacy of stable value. But during the past 40 years of the Fed-managed paper dollar standard, the purchasing power of the dollar adjusted by the CPI has declined a shocking 85%.
Consider also that economic and employment growth, during the long American gold standard period, exceeded that of the present paper dollar era. If fully debated during a presidential campaign, the American people now have the economic facts by which to decide between the manipulated paper dollar and the gold-backed dollar.
It is clear that a Gold Commission II must not be an academic exercise, nor the means by which a paper money majority is enabled to deep-six serious consideration of the means by which to reestablish a stable dollar convertible to gold. The purpose of Gold Commission II should be to spell out a plan whereby Congress and the President are enabled, effectively and successfully, to restore the gold-backed dollar.
All relevant evidence and points of view must be considered, but the fundamental purpose of the Gold Commission II should be to render judgment on the era of the declining paper dollar — its consequences, and above all, the remedies for inflation.
Jim Grant and I have recommended that Gold Commission II should focus on the following agenda in order to show how a stable dollar engenders economic growth and tends toward full employment. The purpose of the agenda should be to demonstrate that a dollar convertible to gold is the missing link in presidential growth plans limited to deregulation, tax reform, and balanced budgets.
- American monetary and financial history, and its lessons for the present and the future;
- American monetary policy and the Federal Reserve System after the restoration of dollar convertibility to gold;
- A practical plan to restore convertibility of the dollar to gold; a timetable by which Congress defines the dollar in law as a certain weight unit of gold, to which bank notes and bank demand deposits would be convertible; a plan to include other major nations in a reformed international monetary system based on stable exchange rates in order to increase world trade.
When considering a practical plan to restore convertibility of the dollar to gold, we have recommended that Gold Commission II consider these specific issues:
- The procedure and transition by which we get from here to there, i.e., from the current paper dollar to the once and future gold dollar.
- The free market period of price discovery during the transition up to a date certain wherein convertibility of the dollar to gold becomes unrestricted. (Consideration of what happens during the run-up to gold convertibility.)
- How to include the international community in order effectively to end the inflationary regime of reserve currencies and how best to include other major nations in a modernized international gold standard? For example, how would America bring other countries into the new monetary system -- one in which a non-national global monetary standard, namely gold (not the dollar) is the world's reserve currency?
- Consideration of the methodology by which Congress and the president should determine the dollar convertibility price of gold (the gold-dollar parity). By using historical and empirical data, demonstrate that the existing world gold stock at the future convertibility price is more than sufficient to maintain the long term convertibility of the dollar and of all other convertible currencies. (Show also that the zero marginal cost of producing a manipulated paper currency lead to long run inflation, but the real costs of labor and capital required to produce the gold monetary standard leads to stability of the currency and long run stability of the price level.)
- Specify the timetable for restoring the convertibility of the dollar to gold at a value which should last for many generations, giving rise to a new international monetary system, free trade and economic growth over the long run.
- To ensure by law the freedom of Americans to use and to save in gold money. The resumption of gold as money in the private and public sector is warranted by the Constitution.
Only convertibility to gold can restore stability and confidence in the convenient use and holding of paper money and bank deposits without government subsidies.
Having served with Ron Paul on Reagan’s Gold Commission in 1981 and having testified recently before his monetary subcommittee, I know first hand what a hero Dr. Paul has been in the campaign for sound money. The entire nation now knows that Dr. Paul, as a presidential candidate, continues to make the case for the gold standard.
Newt Gingrich, to his credit, has added his voice to the alliance for sound money. Let us hope that Governor Romney and Senator Santorum will join the alliance and help to incorporate a restoration of a sound dollar into the Republican Platform of 2012. Who knows? Even a gold Democrat might emerge to pick up the mantle of President Grover Cleveland, a famous gold Democrat, who emphasized the centrality of a sound, stable, constitutional gold dollar.
Recent polling suggests that the American people sense the need for a dollar as good as gold. Now the Republican candidates have the opportunity to fulfill that need, win the presidential election, and restore sound money and economic growth.
Mr. Lehrman, a former member of the United States Gold Commission, is chairman of the Lehrman Institute
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