Amity Shlaes: Nutty would be NOT considering return to a gold standard

Section:

Gold Standard for All, from Nuts to Paul Krugman

By Amity Shlaes
Bloomberg News
Wednesday, May 2, 2012

http://www.bloomberg.com/news/2012-05-02/gold-standard-for-all-from-nuts...

Nut cases. That's what they are. And if you take an interest in them, you are a nut case too.

That's the consensus among credentialed economists who describe advocates of a return to the monetary regime known as the gold standard. In fact, the economic pack will marginalize you as a weirdo faster than you can say "Jacques Rueff" if you even raise the topic of monetary policy in relation to gold.

An example of such marginalizing appears in a recent issue of the Atlantic magazine. Author Adam Ozimek lists four rules upon which economists overwhelmingly agree. Right away, that puts readers on guard; they don't want to be the only one to disagree with eminences.

The first rule Ozimek offers is that free trade benefits economies. So obvious. That makes the penalty for disagreement higher. Then you read down to the final principle: "The gold standard is a terrible idea." By putting the proposition in such strong terms, the author raises the penalty for disagreeing. If you don't subscribe to this view, you risk both being classed as the kind of genuine nut case who believes in protectionism, and enduring the disdain of other economists -- "all economists," as the Atlantic headline writer summarized it.

... Dispatch continues below ...



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Prophecy Platinum (TSXV: NKL) and Ursa Major Minerals
Sign Combination Agreement

Company Press Release
Friday, March 2, 2012

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But "all economists" is not the same as "all economies." The record of gold's performance in all economies over the past century is not all "terrible." Especially not in relation to areas that concern us today: growth, inflation, or the frequency of bank crises. The problem here may lie not with the gold bugs but with those who work so hard to isolate them.

Conveniently enough, the gold record happens to have been assembled recently by a highly credentialed team at the Bank of England. In a December 2011 bank report, the authors Oliver Bush, Katie Farrant and Michelle Wright review three eras: the period of a traditional gold standard (1870-1913); the period of a gold-standard variant, the Bretton Woods gold-exchange standard (1948 to 1972); and a period of flexible exchange rates (1972-2008).

The report then looks at annual real growth per capita worldwide, over many nations. Such growth, they find, was stronger in the recent non-gold-standard modern period, averaging an annual increase of 1.8 percent per capita, than in the classical gold-standard period before 1913, when real per-capita gross domestic product increased 1.3 percent annually. Give a point to the gold disdainers.

But the authors also find that in the gold exchange standard years of 1948 to 1972 the world averaged annual per-capita growth of 2.8 percent, higher than the recent gold-free era. The gold exchange standard is a variant of the gold standard. That outcome doesn't tell you we must go back to the gold exchange standard yesterday. But it does suggest that figuring out how the standard worked might prove a worthy, or at least not a ridiculous, endeavor.

Gold shone in other ways. In a gold-standard regime, money is backed by gold, so it's impossible, or at least more difficult, for governments to inflate. Naturally the gold standard and Bretton Woods years therefore enjoyed lower rates of inflation compared with the most recent era. The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods.

"Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives," wrote Bush, Farrant, and Wright.

Markets and countries enjoyed relative stability in gold-standard years, and capital in those years flowed to worthy growth-generating projects. The main sacrifice in gold regimes that the authors identify is that governments lose authority to micromanage domestic economies. But given governments' records, that may not be such a bad thing, either.

It all suggests that contempt for old gold hands such as Congressman Ron Paul of Texas might not be warranted. And that it might be interesting to peruse the numerous gold-related currency plans outside the door of the academic salon. Plenty of people, many former bankers, think it is time to pass laws returning the U.S. to some version, strong or weak, of the gold standard.

Lewis Lehrman, financier and founder of the Gilder-Lehrman Institute, which focuses on history, recently published a plan to take the world back to gold, "The True Gold Standard." Charles Kadlec, another former Wall Streeter, co-wrote his own proposal, "The 21st-Century Gold Standard," with Ralph Benko. The case for gold as a mandatory metric for the Federal Reserve in setting interest rates is made in new legislation offered by Congressman Kevin Brady, another Republican from Texas. Dozens of state legislatures are introducing their own gold- or silver-related currency legislation.

One reason people slap the nut-case label on others with impunity is that for the past 30 or 40 years most economic education has systematically excluded the gold standard and its exponents from the classroom. It's easy to call something your professors never respected the work of a nut case. But it's also worthwhile to ask why the professors white out the gold standard from the books. Perhaps it is because the systems they raved about in their dissertations, systems of flexible exchange rates, subsequently underperformed.

This inconsistency in their own modeling is of course hard to acknowledge. Recently Bloomberg Television drew enormous attention when co-anchor Trish Regan moderated a debate between Ron Paul and Paul Krugman, the Nobel prize-winning New York Times columnist.

Krugman sought to hold the middle ground, noting that all he sought, through his recommendation that federal debt rise to 130 percent of gross domestic product, was a return to the kind of America in which his parents lived. The professor treated the congressman's remarks as unscholarly; in a blog post afterward, Krugman wrote that "everything Paul said about growth after World War II was wrong."

But Krugman too has some sorting through to do. The years when his parents lived were gold years, the time of the Bretton Woods gold exchange standard, a time when the federal government, except in world war, would never had considered raising debt to 130 percent of the economy, as Krugman suggested in the debate.

If we are going to speak of consensus, let's not forget one that is truly universal: Our economic system stands a good chance of breakdown in coming years. The only way to limit damage from such a breakdown is to ready ourselves to choose other models by learning about them now.

Not to do so would be nuts.

-----

Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute.

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Sona Discovers Potential High-Grade Gold Mineralization
at Blackdome in British Columbia -- 13.6g over 1.5 Meters

From a Company Press Release
November 22, 2011

VANCOUVER, British Columbia -- With its latest surface diamond drilling program at its 100-percent-owned, formerly producing Blackdome gold mine in southern British Columbia, Sona Resources Corp. has discovered a potentially high-grade gold-mineralized area, with one hole intersecting 13.6 grams of gold in 1.5 meters of core drilling.

"We intersected a promising new mineralized zone, and we feel optimistic about the assay results," says Sona's president and CEO, John P. Thompson. "We have undertaken an aggressive exploration program that has tested a number of target zones. Our discovery of this new gold-bearing structure is significant, and it represents a positive development for the company."

Sona aims to bring its permitted Blackdome mill back into production over the next year and a half, at a rate of 200 tonnes per day, with feed from the formerly producing Blackdome mine and the nearby Elizabeth gold deposit property. A positive preliminary economic assessment by Micon International Ltd., based on a gold price of $950 per ounce over eight years, has estimated a cash cost of $208 per tonne milled, or $686 per gold ounce recovered.

For the company's complete press release, please visit:

http://www.sonaresources.com/_resources/news/SONA_NR18_2011-opt.pdf