Forbes: Herman Cain’s Path To A 21st Century Gold Standard

May 22, 2012

Herman Cain was a candidate for the 2012 Republican presidential nomination, creating a revolutionary tax reform plan known as 9-9-9.

Charles Kadlec, Contributor
I cover economic/political issues with liberty as my polar star.
OP/ED|5/21/2012 @ 2:16PM

Herman Cain’s greatest contribution to the Republican primaries was his call for policies that would lead to economic growth by increasing the economic freedom of the American people.  He rose to the top of the polls by matching that rhetoric with his bold plan to replace the current corrupt and inefficient tax system with his now famous 9-9-9 tax reform plan.

Now, in his new book: 9-9-9 An Army of Davids,Cain, along with his Senior Economic Advisor and co-author, Rich Lowrie go beyond 9-9-9 and provide a compelling case and full elaboration on his bold plan to restore economic growth by reforming the tax system, the regulatory state, and the monetary system.  The combination of these reforms, in the words of the authors, would “fundamentally transformWashington.”

The case for 9-9-9 and regulatory reform are fairly well known.  Where Cain breaks new ground is his call for a “21st Century Gold Standard.”  Just as important, he offers a concrete, step-by-step path to make the dollar once again as good as gold, and a new set of operating procedures for the Federal Reserve that would avoid the errors of the past.

The timing of Cain’s book is propitious.  Rep. Kevin Brady (R-TX) and Sen. Mike Lee (R-UT) have each introduced bills in their respective chambers that would take the first steps toward restoring a sound dollar.  By showing that an orderly return to a gold standard is possible, Cain joins Lewis Lehrman, noted financier, monetary authority, and author of The True Gold Standard, in debunking those who claim there is no escape from the paper dollar status quo.

Cain brings to the case for monetary reform his experience as the Chairman of the Federal Reserve Bank of Kansas City, and the work of a team of economic advisors that supported his campaign co-chaired by Mr. Lowrie, this columnist, Brian Domitrovic and Paul Hoffmeister.

In one of the most entertaining parts of the book, the authors capture the craziness of the current floating, paper dollar by asking the reader to imagine what the world would be like if the government could change daily the number of minutes in an hour.  Life would be chaotic. But soon, the private sector would create an entire “chaos industry” to help us cope with the uncertainty of time, just as we now must cope with the uncertainty of the value of the paper dollar.  Before you know it, established media and intellectuals would be “singing the praises of a floating hour and opine on the downright restrictive nature of the old barbaric system” under which people would be expected to arrive to meetings on time!

In a more serious vain, the benefits of a dollar as good as gold are reported:  Higher economic growth, lower unemployment, stable prices, rising real wages and living standards, a less cyclical economy, and virtually no financial crises.  The myths used by the defenders of the paper dollar also are dispelled, most importantly including the charges that the gold standard “caused” the Great Depression, that it would restrict the ability of the economy to grow, and empower Wall Street and financiers to the disadvantage of Main Street and American families.

The historical evidence is clear:  the paper dollar that we have lived under since 1971 has underperformed the gold standard on every important economic variable, and must treated for what it is, an experiment that has completely failed to increase employment and minimize recessions by giving twelve men and women on the Federal Reserve’s Open Market Committee the power to manipulate the value of our money and interest rates.

Six principles are offered to guide the transition to the 21st Century Gold Standard:

1)      Overall prices should remain near today’s levels, including no forced reduction in wages.

2)      The process for establishing the new link between the dollar and gold must be transparent, making use of markets to establish the value of the dollar in terms of gold.

3)      The transition must be gradual, but the path must be clear.  This will permit as smooth an adjustment process as possible.


Daily Reckoning: Ben Bernanke’s Paper Dollar Embodies Systemic Risk

April 26, 2012

Chairman Fed Ben Bernanke during the first of his four lectures on the power & greatness of the Fed and Fiat currency.

By Charles Kadlec

04/25/12 The paper dollar is now the single most important source of systemic risk to the financial system, the world economy, and the security of the American people.

That is the lesson of the past 100 years that Federal Reserve Chairman Ben Bernanke did not teach during his four lectures atGeorgeWashingtonUniversity’s Graduate School of Business. Instead, he celebrated the importance of the extraordinary powers he and his fellow governors have to manipulate interest rates and the value of the dollar in the name of economic growth and stability.

In so doing, he ignored completely that the ever growing need for heroic interventions by the Fed is itself being created by the paper dollar system he celebrates.

This failure is all the more telling because Mr. Bernanke states up front that central banks perform two critical functions: The first is to “achieve macroeconomic stability.” By that, he generally means “stable growth in the economy, avoiding big swings, recessions and the like, and keeping inflation low and stable.” The second is to provide “financial stability” by either trying to prevent or mitigate financial panics or financial crises.

On both counts, the paper dollar system in effect since the final link between the dollar and gold was broken in 1971 has failed and failed miserably when compared to the results produced under the gold standard.

Let’s begin by stipulating that we agree with Chairman Bernanke’s point that the gold standard is not a perfect monetary system. What is?

The more important question is which system, the gold standard or the paper dollar, provides more macroeconomic stability and fewer financial crises.

To answer this question, let’s examine the historic record beginning with the most difficult example, the Great Depression, which supporters of the paper dollar invoke to discredit the gold standard and thereby avoid defending the abysmal record of the paper dollar.

As Professor Brian Domitrovic pointed out in his recent column, the officials running the Federal Reserve in the critical period between 1928 and 1933 chose to ignore the rules of the gold standard, which would have forced them to increase the money supply in response to inflows of gold. Instead, the Fed exercised discretion and tightened, thereby making the deflation of the early 1930s worse than it otherwise would have been. Explains Domitrovic:

“Rather, as (Richard H.) Timberlake has shown, we know what guided Fed thinking in this period, and this was the doctrine that the Fed would refrain from issuing money unless it clearly would go to financing end-point economic transactions, as opposed to things like stock-market speculation and even investment. Whatever you want to say about this doctrine, it has zip to do with the gold standard. And it was at the root of the Fed’s weird decision-making 1928-33 where it presided over a radical narrowing of the money supply.”

What about the claim that, while the gold standard maintains a stable price level over longer periods of time, in the words of Chairman Bernanke: “over shorter periods, maybe 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices.”

After the largest gold discovery of modern times set off the 1849Californiagold rush the price level in theUSrose 12.4% over the next 8 years. Under the paper dollar, that 8 year cumulative increase was exceeded in 1974, 1979 and 1980 alone. Moreover, an 8 year increase of 12.4% is equivalent to an average increase of 1.5% a year. By contrast, current Fed policy calls for inflation to average 2% a year which equates to a 17% increase in the price level over the next 8 years.

Since abandoning the last vestiges of the gold standard in 1971, inflation has averaged 4.4% a year. Nevertheless, various sectors of the economy have suffered Great Depression like deflations. For example, between 1980 and 1986, the price of oil fell 60%, and the price of agricultural commodities and farm land fell by double digits. Those deflations led to the major bank failures of the mid and late 1980s. And, of course, the most recent financial crisis was triggered by a 30% decline in home prices, a disaster for American families, banks and investors alike that ranks right up there with the hardships experienced during the Great Depression.

The net result is that without the guidance of the gold standard, the Fed and the paper dollar have become the leading sources of economic and financial instability. Since 1971, when President Nixon freed the Federal Reserve from the strictures of the gold standard, recessions have become more frequent, longer and deeper. From 1971 through 2010 (under the paper standard) unemployment averaged 6.3%, much worse than the 1947-67 (gold standard) average of 4.7%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and now above 8% for three years and counting.

Under the post-World War II gold standard, there were no financial crises that presented a systemic risk to theUSeconomy. Since 1971, we have experienced the:

1973 oil shock and international monetary crisis

1979 oil shock and dollar crisis

1982 Latin American debt crisis

1984 banking crisis and effective nationalization of Continental Illinois Bank

1987 stock market crash

1989-91 S&L crisis and bailout

1990 Japanese bubble collapse and banking crisis

1994 Mexican peso crisis

1998 Asian currency crisis

2001 dot com crash

2007-09 Housing collapse and international financial crisis

2010-2012 European sovereign debt crisis

In addition, the massive increase in the Fed’s and other major central bank balance sheets since the first quantitative easing in 2009 has coincided with the slowest recovery ever — even worse than the recoveries experienced during the 1930s — and the fear of yet another break out in inflation.

Under Chairman Bernanke’s leadership, the extraordinary steps taken to contain the financial panic in late 2008 and early 2009 by fulfilling its “lender of last resort” role to banks and, under emergency powers granted to it by the Federal Reserve Act, to non-bank institutions, may well have avoided a complete collapse of the world’s financial system.

But to use that success as justification for a discretionary monetary policy and a defense of the Fed’s ability to manipulate interest rates and the value of the dollar is to miss the greater point. The growing instability of the macro economy and the financial system is itself a product of the paper dollar system.

The most important thing the Fed could do now to fulfill its two fundamental roles of providing for a stable economy and preventing financial crises would be to begin an orderly transition back to a dollar whose value was once again defined by a unit weight of gold — that is to make the dollar once again as good as gold. To do otherwise is to leave in place the fundamental source of systemic risk that no amount of increased regulation or oversight can correct — the inherent instability of today’s monetary system based on a paper dollar whose future value is unknown and unknowable.


Charles Kadlec,
for The Daily Reckoning

Fed Chair Ben Bernanke Back in School Trashing Gold

March 21, 2012

Fed Chairman Ben Bernanke delivered his first of four lectures to students at George Washington University trashing the Gold Standard.

Fed Chair Ben Bernanke is taking some time out of his busy schedule to go back to the class room and mold young impressionable minds.  After Rep. Ron Paul ambushed him in committee with the value of a Gold Standard, Bernanke seems to be hitting back with economic sunshine & no hint of QE3.

Yesterday he took the direct approach, while teaching a class at George Washington University attacking the Gold Standard as a waste of resources.  Gold retracted slightly in light of this but is moving back forward today as it steadies above $1650.

Mr. Bernanke can take his best shot at gold but until the global debt issues are resolved and global demand slows, the fundamentals of the yellow metal will continue to drive the price through the end of the decade.

Read further below:

Forbes – Bernanke: Gold Standard A ‘Waste Of Resources’

The problem with a gold standard is there just isn’t enough of the yellow stuff.

So said Federal Reserve Chairman Ben Bernanke Tuesday afternoon in the first of four lectures he will give at George Washington University over the next two weeks. (See “Bernanke Goes Back To School.”)

Paraphrasing economist Milton Friedman, Bernanke said it takes a lot of effort and work to go to South Africa, or somewhere else in the world, dig up a bunch of gold, then just put it back into another hole – in this case the basement of the New York Fed.

Later, during a Q&A period after his lecture, Bernanke acknowledged the main arguments for a gold standard, before dismissing them. Proponents, like Rep. Ron Paul (R-Texas), argue that a gold standard maintains the value of the dollar, under the premise that paper money is inherently inflationary. Bernanke dismissed this, arguing that while the argument may hold for long-run price stability it is not valid on a year-to-year basis. A gold standard, Bernanke said, also stops the central bank from being able to respond to booms and busts through monetary policy.

Such a standard is not practical though, Bernanke continued, as there is not enough gold in the world to achieve a global gold standard without tremendous cost (though that would undoubtedly be a boon for miners like Barrick Gold or Goldcorp).

The Fed chairman also mentioned the deflationary aspect of linking currency to gold, referring to William Jennings Bryan’s famous “Cross of Gold” speech, and noting how a gold standard links the policies of all countries on it, restricting the ability for region-specific monetary policy. (See Bernanke’s lecture and presentation materials here.)

Lastly, Bernanke acknowledged the fallibility of central banks. A gold standard only works if markets are convinced that maintaining that standard is the sole priority. Any hint of wavering and the currency becomes subject to speculative attacks.

Gold prices were down more than $21 to $1,645 an ounce Tuesday. The U.S. dollar index, a measure of the greenback against a basket of foreign currencies, was up 0.2% Tuesday afternoon to 79.59.

Forbes: Applying The Numbers To Gold Supply And Demand

November 8, 2011

2% “fabrication premium” we have today for bullion coins like American Eagles is similar to jewelry premiums in Asia.

Nathan Lewis, Contributor
I write about monetary and tax policy for the 21st century.

One thing you often hear about gold, as a monetary asset, is that the supply of gold – the amount of gold in the world – increases by about 2% each year due to mining. We don’t really consume gold. Most of the gold that has ever been mined (the U.S. Geological Survey estimates 85%) still exists today as bars, coins and jewelry. Even the small bit that is used in industry is often recycled.

The next thing you typically hear is that a gold standard system works because the “money supply” increases at a stable rate, in line with mining production. In other words, the rate of growth of quantity is stable.

This is totally incorrect. If you look at any historical gold standard system, such as the Bank of England in the 1880s, you find that the “money supply” (base money) is in fact quite variable, and doesn’t follow this “2% per year” rule at all.

For example, in 1900, the U.S. monetary base increased to an estimated $1,344 million, from $1,126 million in 1899. That’s an increase of 19.4%.

In 1896, however, the U.S. monetary base fell to $944m from $1,022m in 1895, a decrease of 7.6%.

There’s nothing stable at all about the “money supply” with a gold standard system. It adjusts, automatically via the value parity, to the economic conditions of the time.

The “stable” part is stable value. The British pound maintained a defined value compared to gold. Gold, likewise, maintained a stable value in part because the supply was very large and stable.

Here is one of our favorite 19th century references, John Stuart Mill, on the subject:

“[O]n the whole, no commodities are so little exposed [as gold and silver] to causes of variation. They fluctuate less than almost any other things in their cost of production. And from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden; a very long time being required to diminish materially the quantity in existence, and even to increase it greatly not being a rapid process. Gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period.”

Let’s look at some of the recent specifics. How is gold different than copper?

Continued on Page 2

Forbes: Opponents Of Gold, Get On Your Mark

November 3, 2011

Image by © Stockdisc/Corbis

Brian Domitrovic, Contributor
History, economics, and the supply-side revolution
11/01/2011 @ 11:27AM

As the essential Nathan Lewis, of Forbes and Gold: The Once and Future Money fame, once put it, “monetary interpretations of the [Great] Depression had fallen out of favor somewhat by the 1970s. It wasn’t until the 1980s, as a political drive for a gold-linked currency gathered force, that academics revived old notions about an unstable gold standard.”

Well, academics, you’d better dust off those old notions and start spiffing them up. Because the same individual who set your thoughts a-reeling in 1982 is making waves again in 2011.

But first let’s go back to 1982. In that year, the United States came fairly close to getting back on the gold standard – the very gold standard that had done little things in the past like supervise the industrial revolution. In 1982, the U.S. was considering a guarantee whereby any holder of $500 could claim an ounce of gold in exchange from the Treasury.

This was the suggestion of the intellectual leadership of a commission that had been chartered by Congress to look into the gold question. At the time, it had only been a decade since the U.S. had severed the dollar’s last ties to gold. The thanks the nation had gotten in the interim were a series of double-dip recessions en route to a trebling of the price level; stagflation, in a word.

That intellectual leadership came in the persons of Ron Paul, who has continued to carry the torch of gold to this day at the level of presidential politics, and Lewis E. Lehrman, the entrepreneur and historian. As Wall Street Journal editor Robert L. Bartley once said of Lehrman, “he could and still can tilt monetary policy with anyone.”

Now as it turned out, the Gold Commission of 1982 narrowly voted to hold off on recommending a return to the gold standard, the trenchancy of Lehrman and Paul’s minority report – a volume that still richly repays rereading – notwithstanding.

So reform-wise, nothing happened to our monetary system in the go-go years of the 1980s and 1990s (outside of making celebrities of Fed chairmen). We got our semi-low inflation of 3% for a while. In 2008, the oversight blew up in our face as the Fed virtually took over the world.

Therefore it comes as major news that Lew Lehrman has written a book, The True Gold Standard, just out, that aims to put some oomph in the Rahm Emanuel maxim that you never let a crisis go to waste. The book is clear as can be that going back to gold is precisely the solution that this world economy, longing for stability and prosperity as it is, needs right now.

Consider, for example, this aspect of the true gold standard as discussed in the book (emphasis original): “Gold convertibility and wide circulation of legal tender gold coins put the ultimate regulation of the money supply in the hands of a free people – removing it from arbitrary government control, central bank manipulation, and control by the banking cartel.”

Let’s face it – we’ve seen what arbitrary government control and central bank manipulation can do. Namely, what the Federal Reserve has done since 2008. This is to scare everyone away from the currency such that there’s no investment, with inflation hedges (such as gold) shooting the moon, all the while stiffing the small defaulter and bailing out the biggest of the big.

This kind of anti-democratic monopolism is exactly what the gold standard forestalls, and The True Gold Standard explains why, among much else, in less than a hundred tidy pages.

Here’s another exquisite recommendation from the book: given gold, government bonds can’t count as bank reserves. This will do two things. First, dry up the market for government debt, an unqualified good in our age of trillion-dollar deficits. And second, release bank assets to be at the service of the real economy.

Continued on Page 2

Gold Standard Primer

April 29, 2011

The Gold Standard is idealized by gold-bugs & loathed by Keynesian economists. The gold-bugs are nostalgic for the economy of yesteryear, where gold reigned supreme, backing currency to the fullest.  Those were days of wine & song where everyone owned a Ford Edsel, lived in perfectly manicured neighborhoods with rosy cheeked wife & kids.  All the best of the past, with none of the squalor of tenement shacks & children work houses.

Then come the Keynesian brave new world of floating fiat currency, backed by GDP and the power of the people to produce goods and services. They want and call for government intervention. They believe in a strong central bank that manipulates currency keeping the economy moving forward with minimal downturns. The economist knows best!

The pendulum has swung to the extreme of Keynesian economics and has people talking more about returning to a gold standard. People are looking for stability in pricing, inflation to be stemmed, & real pay increases stopping the sliding standard of living.   What a gold standard wont do is fix economic cycles, nor will it stop unemployment, or balance the budget.

What a gold standard will do is help stem the avalanche of indiscriminate money printing. It will also keep the central banks honest on the value of currencies. Gold gives a definable valued based on the limited amount of gold in the world. It is a solid basis that can be measured and hedges against accountants manipulation of numbers.

Since the central banks globally are not returning to any form of a gold standard anytime soon nothing can stop you from starting your own gold standard. By starting a Tangible Asset Portfolio (TAP) with a conservative 10% to aggressive 20% of your net worth you can stabilize your personal finances. While the rest of the economy is in shambles your personal TAP will give you the financial security the central banks refuse to offer.

Read more: Forbes – What Is the Purpose Of A Gold Standard.

Gold & Silver to Become Legal Tender in Utah

March 14, 2011

Utah State Capital Building

This almost made the cut for the Friday Fun, since we were like giddy kids once we heard that the Utah legislature passed a law legalizing gold & silver currency for the state.  All that is needed is Gov Gary R. Herbert’s signature to bring Utah back on the gold standard.

Republican Brad Galvez who was the House sponsor of the Substitute Currency Amendment told Forbes, this is a step in preparedness, a step in security that allows us to be able to hold up our economy as the dollar continues to shrink. Meanwhile back in Washington DC… The Fed shows no signs of slowing down the presses churning out the next $600 Billion of Quantitative Easing all of it back by US Debt.

Other states are looking to follow Utah’s lead, Montana, Missouri, Colorado, Idaho, Indiana, New Hampshire, South Carolina and Washington have proposed legislation to include gold and silver in its accepted currency forms. With Utah’s shot across the bow of the Fed it can’t be long before more fiscally responsible states consider a Sound Money Act of there own.

Read more at –Forbes: Utah Signals Dollar Distress