14 February 2008

As Good As Gold

I'm afraid I've been making myself rather a bore over at Patum Peperium, which is now attempting to regain its lighthearted, apolitical, literary temperament by posting lighthearted, apolitical, literary pieces by that master of words, Waugh (the last one making a passing reference, certainement pas par hasard, to the gold standard). I wish the P's a lovely vacation, and promise to keep my political nonsense here (unless they bring it up over there, of course).

Speaking of the gold standard, David Frum smirks at Ron Paul (and errs in thinking he is about to quit his run):
Yet I wonder: isn't there something odd about Paul's desire to hold onto those imminently worthless federal shinplasters? Maybe there's something about finally laying hands on a great big pile of Federal Reserve notes that makes one think they might hold some value after all?
Charitably put, file this under "Failure to Grasp the Concept." Surely he agrees that $5 million a handful of years ago is not the same $5 million today? Five years ago, one American dollar could have bought a Canadian cup of coffee and a doughnut. These days, you're lucky to buy a Canadian cup of anything with that same piece of paper.

In any case, only two posts later, Frum is agreeing with his colleague Desmond Lachmann that the coming recession--one of epic proportions--has not a little to do with "the troubled state of today’s banking system".

What exactly is that elusive gold standard? A little history: In 1944, the American dollar became the world reserve currency, replacing the British pound. The world accepted our dollar (defined as 1/35th the value of an ounce of gold) as the world reserve currency. In the 1960s, when Europeans demanded we make good on our promise to give an ounce of gold for every thirty-five dollars paid, our Treasury was nearly drained; we had outprinted ourselves. In 1971, Nixon declared our insolvency, refusing to pay out the remaining 280 million ounces of gold. From now on, the U.S. could print currency without being held to the gold standard; instead, OPEC agreed officially to price oil in the dollar, thus backing the dollar's worth with oil. In return, we agreed to protect the oil-rich Middle East (making us even less popular among the radical Islamists). But because of the dollar's declining influence, there have been moves to start trading oil in euros: Saddam Hussein demanded his oil be traded for Euros shortly before we went to war with Iraq, Chavez offered the same idea for Venezuelan oil, and now Iran has made the same demand.

Returning to the gold standard would ensure far lower inflation, stabilization of currency, and would prevent overprinting of money. It also ensures a system of fixed exchange rates--which means I don't have to check monthly to see how much the dollar is worth in euros (here in France, I can say: not much). Although a return to the gold standard seems wishful thinking in this society so dependent on the Federal Reserve, it's not unwise thinking. No less noteable a man than Alan Greenspan has written:
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense--perhaps more clearly and subtly than many consistent defenders of laissez-faire--that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. . . . This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
From Gold and Economic Freedom, Alan Greenspan, 1967