The True Gold Standard, a lucid, scholarly volume by financier-philanthropist, and Reagan Gold Commissioner, Lewis E. Lehrman, recently has been published in a handsome second, much expanded, edition. Why does this matter?
Central banks have become net buyers of gold for the first time in 20 years. There is uneasiness within the United States and among its trading partners with exotic Federal Reserve policies such as QE1, QE2, QE Infinity and Operation Twist. The value of the dollar has eroded by about 85 percent since Nixon, breaking the dollar’s last link to gold, declared on August 15, 1971 that “your dollar will be worth just as much tomorrow as it is today.” Some argue that the Fed caused the housing bubble, the housing bust, the crash of 2008 and the Great Recession.
The Washington Post’s Ylan Q. Mui recently published a piece about a perfectly sensible proposal being entertained by the Virginia legislature to put together a joint subcommittee to study linking the U.S. monetary unit to precious metals. This modest piece received over 1,300 reader comments. Monetary policy is on the minds of voters.
Internationally, the gold standard is becoming a hot topic. “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound, or any other reserve currency,” stated Evgeny Fedorov to Bloomberg recently. This was no idle prattle—Fedorov is the head of the committee for economic policy and entrepreneurship of the Russian Duma. He is closely aligned with Russian president Vladimir Putin.
The rehabilitation of gold began on November 7, 2010. Ambassador Robert Zoellick, then president of the World Bank Group, published an extraordinarily influential op-ed in the Financial Times entitled “The G20 must look beyond Bretton Woods II.” In it he observed, among others things, that “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” Ambassador Zoellick promptly backpedaled. But his words provided a powerful catalyst. The golden genie is out of the bottle. Its power is immense. And we’d better be prepared to get it right.
About a year later, the Bank of England, the dean of central banks, issued a plenary indictment, “Financial Stability Paper No. 13,” of the performance of the fiduciary currency standard that replaced the gold standard and its simulacrum, the gold-exchange standard. Then the president of the German Bundesbank, Jens Weidmann, devoted a speech, Money Creation and Responsibility, to the devilish nature of fiduciary paper money: “Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too—or even nightmarish.”
Thus the appearance of The True Gold Standard is profoundly timely. Its first edition, published just last year, drew praise from Barton M. Biggs, who has since died, a true titan of finance: “Lehrman is the most profound monetary thinker of our time. … Lehrman in this book analyzes the disorder and lays out an orderly, practical plan to restore economic growth and create a stable monetary system, exchange rates, and end inflation.” Many other hommes serieux extolled it as well.
Lehrman’s book is the gold standard of thought about the classical gold standard. This columnist, mentioned in the work’s acknowledgements, is not objective. But his bias is that of a 30-year follower of Lehrman’s work, beginning around his testimony to the Reagan Gold Commission, and for the past two years, a professional association with the Lehrman Institute.
Lehrman was a student of one of the last great gold standard proponents, Jacques Rueff (and is acknowledged in Rueff’s autobiography). Rueff was French president Charles de Gaulle’s “economic wizard” and the chief architect of France’s post-war economic miracle.
During the years in which the classical gold standard was marginalized Lehrman remained perhaps its foremost intellectual champion. The gold standard has reemerged in economic policy discourse. Thus the “how to” question takes on a new significance. How to get the gold standard right is no trivial matter. When then Chancellor of the Exchequer Winston Churchill restored Great Britain to the gold standard in 1925 he got it wrong, leading to a terrible recession, a million unemployed, and the general strike of 1926. As Peter L. Bernstein explains in The Power of Gold: The History of an Obsession:
When I held other offices under the Crown, he complained to a friend, 'I could always find out where I was. Here I'm lost and reduced to groping.' … A senior advisor, Otto Niemeyer of the Treasury, observed that 'None of the witch doctors see eye to eye and Winston cannot make up his mind from day to day whether he is a gold bug or a pure inflationist.
Moreover, there is compelling evidence that the Great Depression was caused by replacing the gold standard with the “gold-exchange standard,” which, according to Rueff, “will be viewed by history as an object of astonishment and scandal.” Getting the gold standard just right is essential.
Lehrman has distilled a lifetime of study (building upon the life work of Rueff ) to how to get it right. The essence of his thought, setting forth the recipe for how to adopt the gold standard in a safe, secure, way designed not to foment austerity but to help the middle class prosper, is encapsulated in The True Gold Standard. How? From The Lehrman Institute’s monetary reform website, which this columnist edits:
Step 1. America leads by the president announcing unilateral resumption of the gold monetary standard at a date certain, not more than four years in the future (the market adjustment period).
Step 2. The president issues an executive order eliminating any and all taxes imposed on the buying, selling, and circulation of gold.
Step 3. Shortly after the announcement (step 1), the United States calls for an International Monetary Conference of interested nations to provide for multilateral currency convertibility to gold, and the deliberate termination of the dollar-based official reserve currency system.
Step 4. The conference agreement—attended by representatives of the BIS, IMF, WTO, and the World Bank—would establish gold as the means by which nations would settle residual balance-of-payments deficits.
Step 5. A multilateral international gold standard—the result of the currency convertibility agreement—would effectively terminate floating exchange rates, reestablishing stable exchange rates among the major nations.
Rep. Kevin Brady (R-TX), incoming chairman of the Joint Economic Committee, introduced the Sound Dollar Act last year, promptly enrolling 49 co-sponsors. Brady, who with Lehrman recently co-authored a Wall Street Journal column on “Lincolnomics,” is expected to reintroduce this early in the 113th Congress. The legislation injects gold into monetary policy.
The gold standard no longer is considered a “barbarous relic.” With The True Gold Standard officials will be able to make a well-grounded assessment of not only whether, but how, the gold standard should be restored as the gyroscope — and essential factor in robust job creation and potent deficit reduction—of both U.S. and worldwide monetary policy.
Ralph Benko, a former deputy general counsel serving in the Reagan White House, is the senior advisor, economics, to the American Principles Project and advisor to, and editor of the Lehrman Institute's thegoldstandardnow.org. He contributes a weekly column to Forbes.com Opinions.