(This item originally appeared at Forbes.com on September 1, 2016.)
For now, everybody is terrified of rocking the boat. They sense that things could easily spiral into crisis – currency crisis, banking insolvency, derivatives breakdown, sovereign default, pension insolvency, perhaps accompanied by some changes in governments themselves. The stock market might go down.
But, the boat will probably rock itself before too long. There’s a chance that monetary reform will begin to happen as early as 2018. China and Russia are already getting ready. Judy Shelton, a well-known gold standard advocate, recently became an advisor to Donald Trump. David Malpass, another Trump economic advisor, is known for being somewhat gold-friendly. Alan Greenspan, the most successful central banker of the floating fiat era, has been expressing his admiration for the pre-1914 Classical Gold Standard era.
At that point, things might become very immediate and practical. Those who wish to end the four-decade experiment in floating currencies, and return to the gold-based system that the Western world (and the rest of the world too) used for centuries until 1971, will have to be ready for Game Day.
For many years, Team Gold was nowhere near ready. Indeed, the reason that the Bretton Woods system collapsed in 1971 was not because people decided to try something different – this was after the two most prosperous decades of the last century — but because they didn’t know how to maintain what they had. One of the most prominent gold standard advocates, Murray Rothbard, openly advocated a 95% devaluation of the dollar. In his 1962 book The Case For A 100% Gold Dollar, Rothbard said:
Depending on how we define the money supply- and I would define it very broadly as all claims to dollars at fixed par value-a rise in the gold price sufficient to bring the gold stock to 100 percent of total dollars would require a ten- to twentyfold increase.
In that book, Rothbard actually mocked Walter Spahr, who (along with the U.S. Treasury and Federal Reserve, including its chairman Arthur Burns) wanted to maintain the $35/oz. parity of the time.
A little less wacky stance was held by a variety of people loosely associated with Ludwig von Mises, who suggested a devaluation to perhaps $70/oz. Rothbard says that Spahr expelled Henry Hazlitt from his organization for making such suggestions. Another was Jacques Rueff, who, in a series of writings in the 1960s (contained in The Monetary Sin of the West), recommended a devaluation of the dollar to $70/oz.
President Richard Nixon, by comparison, was practically a hard-money saint. Attempting to fix the problems caused by the floating of world currencies in August 1971, he put together the Smithsonian Agreement in December 1971, in which the dollar would be relinked to gold at $38/oz.
Is it OK if I blame these people, at least in part, for the end of the world gold standard in 1971? Anyone who doesn’t assign at least some blame here is probably deep in denial.
This kind of kindergarten mayhem isn’t really going to help with the reconstruction of a world gold standard system, perhaps beginning in 2018. We need some serious people. Fortunately for all of us, this is starting to happen.
I suggest that this necessary expertise has two basic elements: Why and How.
WHY: The real goal here is Stable Money – money that is stable in value. Linking the value of a currency to gold is just a practical means of achieving this goal. It’s the best method that anyone has ever been able to find. It is also a method, as proven over the last five hundred years of economic history, that works pretty darn well in practice. There aren’t even really any contenders today, even in the form of a proposal. When you hear about all the variations on “stability” proposed by economists – including “price stability” – these are basically rhetorical masks concealing a floating currency system.
HOW: The Nixonites didn’t actually want to create a floating fiat currency system in 1971. They wanted to maintain the dollar’s link with gold, at $35/oz. The problem was that they did not know how.
They didn’t recognize that you couldn’t have both a fixed-value system (the gold parity at $35/oz.) and also a discretionary domestic monetary policy – the “discretionary domestic policy” that Nixon was relying on for his re-election in 1972. It’s a recipe for certain disaster.
If you decide to have a fixed-value link – with gold, or even with another currency like the euro or dollar – then you need to also have an automatic system that has no discretionary element. The purest expression of this is today’s currency boards. Central banks in the pre-1914 era had a similar system, although it was rather more complex in operation than a simple currency board. (I discuss this topic in detail in Gold: the Monetary Polaris.) Germany and Japan adopted essentially automatic processes during the Bretton Woods era.
When people have mastered the Why and the How, then they will know exactly what they want, and exactly how to accomplish it. Today’s arrangement will look like self-destructive madness. Sometime after the currency reform of 2018, historians will marvel that people could have ever been so stupid.