As noted in last week’s column about the rising recognition by authorities in Germany about the virtues of gold, the gold standard is receiving impressive new recognition internationally. The GOP plank calling for a commission to study “possible ways to set a fixed value for the dollar” — with an unmistakable nod to gold — is the most prominent element of the 2012 GOP platform still being heard to “reverberate around the world.” Meanwhile, it continues to gain impressive momentum in the United States.
CNN’s Kevin Voigt writes, in The China Post, “Currencies: Re-evaluating the ghost of gold:”
One platform of the recent U.S. Republican National Convention that, ultimately, could reverberate around the world is a plan to study a possible return of the U.S. to the gold standard. While it was perceived as a move to appease the party’s extreme right wing, economists like Mundell think the world needs a limited return to the gold standard.
This is by no means an isolated blip on the economic radar screen of China watchers. As Christopher Potter, president of Northern Border Capital Management, so astutely observed in a column entitled China’s Preparing for the End Game — Are We Paying Attention, published in The Lehrman Institute’s TheGoldStandardNow.org — which Potter advises (and this columnist professionally edits):
- China is … increasing its monetary gold reserves at an alarming rate. Five years ago China surpassed the US in gold production and five years from now it will own more gold than the US Federal government.
- China is preparing for a world beyond the inconvertible paper dollar, a world in which the renminbi, buttressed by gold, becomes the dominant reserve currency.
- The Chinese government has recently removed all restrictions on personal ownership of gold; legalized domestic gold exchange traded funds; is currently purchasing 100% of domestic gold mine production; has imported over 750 tons of gold (27% of global output) in the last 12 months; stated publicly its intention to add 1,000 tons per year to its central bank gold reserves; and is buying major stakes in foreign gold mining companies. The scale of this initiative is extraordinary.
Commenting on the recently announced acquisition of African Barrick Gold Ltd. by state-owned China National, CEO Sun Zhaoxue stated,
As gold is a currency in nature, no matter if it’s for state economic security or for the acceleration of renminbi internationalization, increasing the gold reserve should be one of the key strategies of China.
This is not the first emergence of authoritative attention to the power of gold as the monetary unit by China in recent years.
Wikileaks provided a notable cable dated February 8, 2010 sent from the U.S. embassy in Beijing excerpting a story from Shanghai’s China Business News that observed:
If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.
This implies a preposterous devaluation, which is not the direction toward which the key gold standard proponents are progressing. Gold’s proponents have no interest in scalding creditors … or debtors.
A better grasp of the implications of gold is demonstrated by Zhou Qiren, Dean of Peking University’s National School of Development and a member of the People’s Bank of China Monetary Policy Committee. Zhou was interviewed by China 2011 Economy staff reporter Ye Weikian last year.
Q: Proposals to go back to the gold standard are now reappearing. Do you think this is feasible?
A; If the currency of each major country is bound to gold, financial headaches would of course be reduced. Taking QE2 as an example, if this were the 1880s, the currencies of the major western countries would be measured in gold. Unless the U.S.Treasury suddenly gained a large quantity of gold reserves, it would be impossible for (U.S. Federal Reserve Chairman Ben) Bernanke to print US$ 600 billion to purchase long-term debt. If there is a commitment to a gold standard system, such as the Bretton Woods system in place until 1971, the Fed could not easily ease its monetary policy, because not only could each country with dollar holdings hold them accountable, they could also redeem their dollars for gold to see how much Uncle Sam’s promise is worth.
A gold standard also would eliminate exchange rate wars. Since all major currencies could be exchanged for gold or other currencies pegged to a currency that follows the gold standard, exchange rates would remain stable without anyone doing anything. Where would exchange rate disputes come from? In short, the gold standard would effectively prevent each country’s government from recklessly levying ‘inflation taxes’ domestically and passing troubles to others by manipulating currency exchange internationally.
Of course, this is an excellent monetary system.
Dean Zhou presented, later in the interview, as pessimistic about the political possibilities of implementing the gold standard. He shouldn’t be.
Respected figures from the United States are now taking a more forward leaning stance in growing recognition of gold’s potential significance. Joint Economic Committee Vice Chairman Kevin Brady addressed the Prosperity Caucus on September 19th in Washington DC. He alerted the Caucus to the significant and rapidly growing support for the Sound Dollar Act. This columnist has termed that bill, sponsored in the Senate by Sen. Mike Lee, the most important monetary reform legislation in 40 years.
The Sound Dollar Act isn’t the gold standard. Yet it is widely seen as a major step toward creating a process to enable the reform of American monetary policy to a rule-based one. Furthermore, the Sound Dollar act is well designed to provide a context in which official reconsideration of which rule — the Taylor Rule or the classical gold standard — is, empirically considered, the better foundation for American monetary policy.
The day after Rep. Brady’s address Rep. Ron Paul held what likely will prove his final hearing as chairman of the House Domestic Monetary Policy subcommittee. Its purpose was to review the economic distortions caused by artificial manipulation of interest rates by the Fed. The hearing featured two of the leading proponents of what could be called the “American Principle” gold standard: journalist/belle-lettrist James Grant and financier/philanthropist Lewis Lehrman.
Both Grant and Lehrman outlined the severe problems that the Fed’s central planning of our financial system are causing. Rather than focusing on the fiendish problems caused by paper money, Lehrman extolled the dignity and moral heroism of Ron Paul for keeping the issue of monetary reform alive and concluded:
Now we are able to formulate an authentic, bipartisan program to restore 4 percent American economic growth over the long term. … [T]hese reforms can be made effective for America and the world by a modernized gold standard and stable exchange rates.
The most riveting political commercial of the 2010 election cycle was an independent expenditure by Citizens Against Government Waste entitled “Why do great nations fail?” — generally known as “the Chinese Professor.” It portrays a Chinese Professor, in Beijing 2030, attacking Obama’s profligate spending policies and the debts America incurred. It concludes, to the laughter of the audience, “and now they work for us,” and received millions of YouTube views.
Chinese mercantilist policies are beginning to emerge as a subject of the 2012 presidential race. Rather than engaging in a blame — and maybe trade — war, however, a more optimistic possibility is emerging: the gold standard.
The road to the restoration of harmony, and mutual prosperity, is becoming the subject of renewed recognition both in China and America (as well, as noted last week, in Germany both by Deutsche Bank and the Bundesbank president Jens Weidmann).The classical gold standard, conjoined with other free market policies, offers the very real, very attractive, possibility of renewed worldwide prosperity. To quote one of the great supply-siders of modern history, Deng Xiaopiing: 致富光荣:“To get rich is glorious.” There is a dawning recognition, the hilariously reactionary Paul Krugman notwithstanding, that the road to prosperity is paved with gold.
This article was previously published at Forbes.com.
Leaving aside talk of a gold “standard” (would the gold be the money or not? a “standard” did not stop Benjamin Strong’s credit money expansionism in the late 1920s) there are three points of real importance here.
The Chinese government is buying gold. Ordinary Chinese are buying gold. And the Chinese government is allowing them by gold – legally (without limits).
So gold, yes agreed, is clearly a thing of the future – and Paul Krugman is a creature of the past.
I don’t believe a new gold standard can possibly happen unless there were to be a complete meltdown of the current un-backed monetary system. There are just too many powerful forces that will do whatever to ensure central banks can continue to fund government debts with money printing.
If you read the Huerta de Sotos’s proposal, there is a fine, easy and stable way to recover the gold standard. The only problem is the power politicians would lose in the change…