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A professor's mistaken disparagement of the gold standard
12:38p ET Sunday, November 22, 2020
Dear Friend of GATA and Gold:
GATA does not advocate returning currency systems to a gold standard. This organization advocates free and transparent markets for the monetary metals and keeping government out of them.
Of course if governments adopted such a policy, people everywhere probably would remonetize gold as the world reserve currency in less than a week, diminishing the influence of government-issued money and thereby also diminishing government power.
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That's exactly why governments long have striven mightily -- sometimes openly, sometimes surreptitiously -- to drive gold out of the world financial system and discredit it as money. Gold is the most serious threat to government power and the strongest protector of individual liberty, a point that often has been made through the ages, almost back to the very invention of money, though it is most politically incorrect today.
Defending the monetary status quo this week, Michael Klein, professor of international economic affairs at the Fletcher School at Tufts University in Medford, Massachusetts, published an essay disparaging the gold standard and Federal Reserve Board nominee Judy Shelton for her sympathy to it.
Professor Klein's essay, "What's the Gold Standard, and Why Does the U.S. Benefit from a Dollar That Isn’t Tied to the Value of a Glittery Hunk of Metal?," posted at The Conversation here --
-- may express the financial establishment view well enough but it is so misleading and even erroneous as to deserve rebuttal.
Professor Klein notes that the international gold standard that worked well throughout the first century of the industrial age was dropped at the outbreak of World War I. But he doesn't explain why it was dropped. That is, of course, because monetary gold imposes restraint on government and thereby hampers the waging of war.
Professor Klein writes: "Afterward, some countries such as the United Kingdom and United States continued to rely on gold as a centerpiece of their monetary policies, but lingering geopolitical tensions and the high costs of the war made it much less stable, showing its severe flaws in times of crisis."
What this really means is that the gold standard kept getting in the way of stupid imperial wars and other governmental extravagance. Would the U.S. have waged so many such wars after disconnecting the dollar from gold in 1971 if the country didn't also have the advantage of issuing the world reserve currency? That advantage freed the U.S. from monetary restraint and allowed the country to stick the rest of the world with the cost of those wars.
Professor Klein writes: "The onset of the Great Depression finally forced the U.S. and the other countries that still pegged their currencies to gold to abandon the system entirely. Economist Barry Eichengreen has found that efforts to maintain the gold standard at the beginning of the Great Depression ended up worsening the downturn because they limited the ability of central banks like the Fed to respond to deteriorating economic conditions. For example, while central banks today typically cut interest rates to boost a faltering economy, the gold standard required them to focus solely on keeping their currency pegged to gold."
But this is misleading, since governments that believe they need more money under a gold standard can always devalue their currencies in gold terms. That's exactly what the U.S. did in 1933 and 1934.
Professor Klein writes that since 1971, when President Nixon terminated the international convertibility of the dollar to a fixed weight of gold, "major currencies like the dollar have traded freely on global exchanges, and their relative value is determined by market forces."
Free currency markets? Let's hope that Professor Klein isn't teaching that fable to his students. Apparently he has never heard about central bank currency market intervention generally or, particularly, about the Bank for International Settlements, which acknowledges that its primary purpose is to give camouflage to central banks in their rigging of the currency markets, including the gold market:
Professor Klein writes: "The dollar in your pocket is backed by nothing more than your belief that you'll be able to buy a hot dog with it."
Not so. Quite without formal convertibility to gold or to anything else the U.S. dollar and most government currencies are powerfully backed -- by the taxing power of the governments that issue them. Indeed, governments that issue money that is not formally convertible at a fixed rate are free to issue essentially infinite amounts of money, as they lately have been doing, restrained only by the risk of currency devaluation. Governments issuing inconvertible currency impose taxes not to raise money for themselves to spend but to create demand for and give value to their currencies.
Professor Klein writes: "It is particularly odd, however, to advocate for a gold standard at a time when one of the main problems a gold standard would supposedly address -- runaway inflation -- has been low for decades."
Apparently Professor Klein believes government data on inflation. But many people who live in the real world -- people who, for example, pay taxes, medical insurance premiums, and college tuitions and who buy food -- don't believe it as much as Professor Klein does.
Professor Klein writes: "Clearly, it would be destabilizing if the dollar were pegged to gold when its price swings wildly. Exchange rates between major currencies are typically much more stable."
But where does the volatility of the gold price come from? Has Professor Klein ever investigated surreptitious intervention in the gold market by governments and central banks, precisely to prevent price stability? He gives no indication of doing so.
Professor Klein writes in defense of the Federal Reserve: "The Federal Reserve is an independent agency that is vital to America's economic stability and prosperity. Like the courts, it is important that it acts with integrity and free from political considerations."
But if it is acting with integrity and serving the public interest, why is the Fed so often acting in secret as it bestows its monetary patronage on the favored few, especially investment banks? And since control of money and interest rates is essentially control of the value of all capital, labor, goods, and services in the world -- control of nearly everything -- how can this control be removed from politics without also removing it from democracy?
Maybe someday one of Professor Klein's students will challenge him on these issues. That might be an interesting class.
CHRIS POWELL, H.S.G.
Gold Anti-Trust Action Committee Inc.
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