In the aftermath of former House Speaker Newt Gingrich's call for a new Gold Commission, columnist Gary Weiss launched into a witty attack on proponents of the gold standard:
Gold bugs, the lunatic fringe of investing and economics, have crept into national politics. What's next? Flat-earth advocates? Area 51 conspiracy theorists?
Weiss is in excellent elite company. According to a letter to the New York Times, "When asked about a gold standard [at a February interview at the 92nd Street Y in New York City former Treasury Secretary Larry] Summers recoiled and shrieked, 'A gold standard is the creationism of economics!'"
That great bastion of reaction, the University of Chicago, and specifically its Booth School, recently polled 40 economists to discover exactly none supporting the gold standard. Austan Goolsby, former chairman of the Council of Economic Advisers, also of Booth, tweeted, as part of #fedvalentines, "Roses are red. Violets are pink. Don't listen to goldbugs. No one cares what they think."
All very merry. The only problem? Two, really.
Violets aren't pink.
And lots of people are beginning to care what goldbugs think.
Not so very long ago the gold standard was considered a maverick proposition. But while Professor Goolsby and Gary Weiss have been off smelling the flowers something fundamental has changed.
Weiss is certainly right about one thing. Gold has crept into national politics. As a recent columnist in Forbes.com wrote:
I just spent three days at the Conservative Political Action Conference (CPAC) - a conference filled with 18 to 29 year olds -- and it seemed that everywhere I turned, I bumped into gold. In less than 10 minutes in the conference's exhibition section, I collected three books/monographs (A Guide to Sound Money by Judy Shelton; The 21st Century Gold Standard by Ralph Benko and Charles Kadlec; The True Gold Standard by Lewis E. Lehrman) and a dozen pamphlets on the merits of gold. On Thursday, I swung by one of the conference's first breakout sessions: "The Need for a Twenty-first Century Gold Standard." When I asked CPAC participants what issues they cared about, "the economy" and "jobs" of course topped the list, but, bizarrely to me, "the gold standard" regularly came up as an issue of importance.
The mainstream media, among others, while not yet rushing to embrace them, has adopted a generally respectful tone toward proponents of the gold standard. The mainstream rehabilitation of gold might best be summed up by a headline in The New York Times of last Aug. 15th, "A Gold Standard Is Unthinkable No More," which concludes "A return to the gold standard remains unlikely, but it's no longer unthinkable."
Nor is the New York Times an outlier here. Very recently, the Wall Street Journal -- which has been steadfastly agnostic about the gold standard -- carried an article by one of its editorial board members referring to Speaker Gingrich's call for a Gold Commission as one of the campaign seasons "best ideas" and suggesting that Gov. Romney poach it.
Now two frightening outposts of the lunatic fringe, The Atlantic Monthly and The New Yorker, give, at the very least, grudgingly respectful hat tips to the gold standard. The Atlantic Monthly, ran a fascinating and erudite article by David Wolman, Wired (yes, Wired, that icon of all things musty and anachronistic) contributing editor, former Fulbright journalism, titled A Short History of American Money, From Fur to Fiat , observing:
[T]he founding fathers deliberately forbid the nascent federal government from issuing "bills of credit." Paper money, one delegate noted, was "as alarming as the Mark of the Beast." The federal government was, however, granted authority "to coin money, regulate the value thereof ... and fit the standard of weights and measure.
Weiss may consider it poor form -- "lunatic fringe" -- to stand for the integrity of the U.S. Constitution. Yet there remain a few of us who bitterly cling to the protections of the Bill of Rights -- the First Amendment, Mr. Weiss, surely you've heard of it? -- and regret to see the Constitution blithely ignored rather than respected. If that makes us the moral equivalent of "flat earth advocates," well, so be it. Meanwhile, The New Yorker's Feb. 27 issue on presidential candidate Ron Paul entitled Party Crasher observes in passing that
In 1971, when President Richard Nixon announced that American dollars would no longer be redeemable for gold, Paul saw disaster, and when he ran out of friends and family members and patients to warn, he became a political candidate, which gave him an excuse to warn strangers. For Austrian economists, the appeal of gold is obvious: it is a precious metal that has been precious for a long time, which makes it relatively immune to government manipulation. And for Paul, talking about gold is a way to talk about inflation, which tends to inspire a visceral reaction in voters. Our hard-earned money decays a little bit every day, just as we do. Most orthodox economists have concluded that eternal inflation isn't necessarily harmful, as long as it can be kept mild. (They disagree, of course, on how, or even if, this can be done.) And while some of them might prefer the gold standard to our current system, few would want to risk the potentially ruinous transition away from fiat currency. Even so, there is something seductive about Paul's vision of a gold-pegged dollar, holding its value across the centuries -- glittering instead of moldering.
This observation is liberally salted with a mysterious, and unexplained, cautionary ("the potentially ruinous transition away from fiat currency") yet shows a measure of respect for the gold standard. So, for that matter, did "lunatic fringe" NPR's John Ydstie's recent GOP Candidates Reopen Debate Over Gold.
Gingrich's support for the idea goes back to his days in Congress when the supported the 1984 Gold Standard Act. Gingrich has said his commission would be co-chaired by investment banker Lewis Lehrman and Jim Grant, a respected Wall Street publisher.
"'I have no idea about what Mr. Gingrich is thinking. I simply don't know his political calculus in this, but I think it's high time that someone in American politics raised the question and helped us form the debate about fundamental monetary change,' Grant says.
Even former International Monetary Fund chief economist and gold-standard opponent, interviewed by Ydstie, Simon Johnson
says he welcomes the debate over the country's monetary policy sparked by the call for a return to the gold standard. While he argues gold is not the answer, he says U.S. monetary policy needs to be reformed so powerful interests like the big banks can't take advantage of it.
On what might the gold standard's rehabilitation be based? It is, in fact, based on empirical data and a sober reassessment.
No less than the Bank of England issued a paper, late last year, reported by Bloomberg, Forbes, and, most recently, by AOL's DailyFinance. All of the journalists appear to have reached the opposite conclusion to that of Weiss: The goldbugs are not crazy. Rather the fiduciary monetary standard managed by elite civil servants such as Paul Volcker, Alan Greenspan and Ben Bernanke, scores, as an empirical matter, somewhere between a deep disappointment and . . . a catastrophe as a policy. John Maxfield, contributor to The Motley Fool:
Economists at the Bank of England explored the subject in a recent paper comparing the monetary regimes of the last century. [T]he Bretton Woods system averaged the highest annual world GDP growth, more than double the average growth experienced under the gold standard and 100 basis points better than the current system. In terms of inflation, however, the gold standard was leaps and bounds ahead of both the Bretton Woods and current regimes.
Where these systems really shone, however, was when the authors looked at the incidence rate of monetary crises under each regime. Both the gold standard and the Bretton Woods system performed dramatically better than the current system. During the years Bretton Woods was in place, there was an average of 0.1 banking crises per year. Since 1972, there have been an average of 2.6. And the same can be said about currency crises. During the gold standard's reign, there were 0.6 currency crises per year, compared to 3.7 a year since 1972.
There is, of course, an exceptionally delicious irony to Weiss calling proponents of the gold standard "flat earth advocates" and Secretary Summer's referring to us as "creationists." These gentlemen join in solidarity with one of the great critics of the gold standard, William Jennings Bryan, who, in losing his 1896 presidential race, so memorably perorated that "you shall not crucify mankind upon a cross of gold."
The rest of the story? Bryan mostly is remembered today as the prosecutor of John Scopes for having dared to violate the tenets of Creationism and teaching the students of Tennessee the radical doctrine of Evolution. So . . . it is the paper proponents, not the gold advocates, who have made their peace with the great Creationist.
Weiss, Summers and all of their rapidly obsolescing paperbug comrades? As you proudly defend the Nixon paper dollar system -- which the empirical evidence shows, quite decisively, to be inferior to gold -- welcome to your roles as the protagonists in the 21st century version of Inherit the Wind.
Originally published March 5, 2012 http://www.thestreet.com/story/11443386/1/gold-standard-is-sound-policy.html