No sooner had word leaked that the GOP was considering a plank in its 2012 platform calling for a gold commission to study the viability of returning to a gold standard, did CPM Group— long known for its anti-gold positions— issue a commentary ridiculing the gold standard. I disagree with nearly all positions in the commentary. One, however, with which I agree, I reserve for comment in a later post.
CPM asserts that “Every gold standard that has ever existed has collapsed. . .” and ends with the title to its conclusion being “Gold Standards Do Not Work.” Not unnoticed was that CPM failed to even attempt to discuss why “Every gold standard that has ever existed has collapsed. . .” and why “Gold Standards Do Not Work.”
When gold standards collapse, they do so because politicians lack the discipline required for the gold standard to work. Under a gold standard, money creation is limited to a ratio of the nation’s gold supplies. That limitation may be 100% (the best) or a fraction of the gold reserves, maybe four times the value of the nation’s gold reserves.
But, the most important aspect of a gold standard is that those little pieces of government-issued paper are redeemable in gold on demand. If too much money is created, the holders of the paper can put a check on further money creation by presenting their pieces of paper and asking for physical gold, gold coins (specie) preferably.
Ideally, when the politicians see paper receipt holders forming lines outside banks to pick up the gold backing their “money,” they cease creating money and take measures to restore public confidence in paper money, such as reducing spending. The politicians readily realize that if they do not take steps to stop the bleeding, soon the government’s vaults will be emptied of gold. In reality, though, politicians renege on their promise to redeem paper money in gold by going off the gold standard, hence “Gold Standards Do Not Work.” We need go no further than the United States for a prime example.
In 1933, in the midst of the Great Depression, the Roosevelt administration embarked on aggressive statist New Deal programs (WPA, CCC, NRA, etc.) to end the Depression. The programs involved the borrowing of huge sums to money, and in the 30s Americans still understood that the paper dollars they were holding were only receipts for gold. Gold certificates, they were, and they functioned as money (gold) substitutes as long as the people had faith that they could be redeemed in specie (gold coins).
At the time, opponents of such government programs railed against them, resulting in some forward-seeing Americans to begin converting their gold paper receipts for specie. The Roosevelt administration nipped that movement in the bud by voiding, via Executive Order No. 6102, Americans’ right to own gold coins and physical gold bullion.
However, foreign governments could still redeem gold certificates in bullion and did so until August 15, 1971 when President Nixon “closed the gold window,” which was a default on America’s promise to redeem its paper money in gold. (Had Nixon not done so, five European nations were about claim the bulk of the gold remaining in the vaults at Ft. Knox and the Federal Reserve Bank of New York, where the nation’s gold is supposedly stored.)
It is true that “Gold Standards Do Not Work.” But they do not work because politicians lack the discipline to stay on them.
Since CPM does not believe in gold standards, what is their solution to the economic/financial chaos that has terrified the markets since 2008? Monetary Discipline.
Yes, CPM twice notes in their conclusion that monetary discipline—not the gold standard—is the solution to today’s economic/financial chaos. To be precise, CPM posits:
Indeed, any return to a gold standard could only be effected by first establishing a disciplined creation of currency, and once that was achieved, as a prerequisite of a return to a gold standard, the return to a gold standard would be redundant and unnecessary. What is needed is monetary discipline.
Now, one would think that because CPM puts so much faith in monetary discipline they would have outlined the monetary program that would provide the form of monetary discipline in which they have such great faith. They did not. Perhaps because they recognize that if politicians do not have the discipline to stay on a gold standard, they do not have the discipline to stay on any other system where money can be created at will.