A New Case for Gold

While Ron Paul lost the battle for the presidency, he may yet win the war for sound money. At least the intellectual battle might be won, and that’s the crucial one.

The GOP platform effectively calls for a new gold standard commission to consider returning gold backing to the dollar. It is vaguely stated. It pushes the idea of a currency with “fixed value,” which is neither possible nor desirable. But we know what this is about: reforming the system to make the world “dollar” mean something real.

When was the old Gold Commission? After Nixon cut the last strands of the U.S. dollar’s tether to gold in 1971, price inflation exploded. In 1980, with the CPI running 12.5-15%, Sen. Jesse Helms was able to get a bill calling for the Gold Commission passed.

The 17-member commission initially met in September 1981. The four-hour meeting produced nothing but arguments. “We can’t even agree on the historical facts,” Treasury Secretary Donald Regan told the press at the time.

The commission was stacked with monetarists and Keynesians who were hostile to gold. The only two pro-gold members were businessman Lewis Lehrman and Congressman Paul. In the end, despite President Ronald Reagan reportedly being sympathetic, the commission formally voted against reviving a gold standard. The fiat money orthodoxy remained.

The vote was, as Ron Paul wrote, “a foregone conclusion.” But alas, the commission was not all for naught. A gem of a book, The Case for Gold: A Minority Report of the U.S. Gold Commission, arose from those meetings.

Lehrman and Paul were fighting an uphill battle. They had to assemble a bulletproof case for a return to gold, and this book is that case.

This issue is white-hot again after years of Federal Reserve monetary pumping. The gold discussion is no longer the territory of just conspiracy theorists and historians. As Seth Lipsky writes in the Aug. 30 Wall Street Journal, the gold standard is now mainstream.

Although published three decades ago, Paul and Lehrman’s book will stun you with its relevance. The first sentence reads, “The United States is now in the most-serious recession since the 1930s.”

At the time, the U.S. was only a decade into a dangerous monetary experiment that was unique in the nation’s history. There was no circulating gold and silver, replaced by paper money managed by central bank bureaucrats. The results were high inflation, a stagnant economy, and high interest rates. Today, it is deja vu, with the exception of interest rates that have been pinned down (for now) by the central bank.

The continual monetary expansion during the 30 years since the Gold Commission met and rejected gold has seen a continual string of asset bubbles and ruinous crashes. Stocks, real estate, commodities, art, and so on have all taken turns at being the focus of money-induced manias, only to crash spectacularly, in turn destroying both precious capital and people’s savings and livelihoods.

Many commentators blame capitalism for these booms and busts, when, in fact, it is a paper money system controlled by government force that creates this destructive chaos.

The Case for Gold is more than a wonky policy paper. Roughly half of the book is devoted to the history of money and banking in the U.S. Another large section is devoted to free banking and private coinage throughout history. The authors thank Murray Rothbard (along with Christopher Weber and John Robbins) in their acknowledgements, and Rothbard fans won’t have to read far, especially in the history section, to detect his influence.

The authors answer critics that claim the gold standard has failed throughout history, pointing out that it was men and governments that failed by abusing various versions of the gold standard. The yellow metal itself has never failed. It’s the money that built modern civilization.

The benefits of a gold standard are many. The business cycle would be tamed; government debt held in check; interest rates and unemployment held low; real economic growth enhanced.

But gold haters are numerous. A common complaint about the gold standard, from academics to the common man, is that economic growth depends upon monetary growth. The gold standard would stop the growth of money and, in turn, economic growth. But Paul and Lehrman wisely point out that real economic growth comes from productive efforts. Monetary growth only distorts the economy and provides false signals to entrepreneurs. It is saving, capital accumulation, and an ever-increasing division of labor that promotes economic growth.

Sound money ensures that capital is directed toward its most-productive uses. Inflation, on the other hand, misdirects capital from productive to unproductive uses. Inflation promotes spending and waste at the expense of saving and prudence.

The authors address a number of common complaints, including the first one that gold advocates will encounter: There’s not enough gold. In 1979, there were 35,000 metric tons of gold. Now there is much more. Gold is not destroyed. It just changes form, and more is mined every year. Besides, it’s all about the exchange ratio. Doubling the exchange ratio, the authors point out, doubles the money supply.

As Murray Rothbard told us in class years ago, “You could have a gold standard with one ounce of gold.” Its purchasing power changes based on supply and demand.

While Fed Chairman Ben Bernanke has been hailed as a hero in the wake of the financial crisis for printing money, Lehrman and Paul would label him no better than a counterfeiter who illegally prints money. Printing money to buy votes “is the most immoral act of government short of deliberate war.”

For those readers dying to know how we get from “fiat A” to “gold Z,” the book’s last chapter lays out the policies needed. Legal tender laws must be abolished. The government must accept payment for taxes in gold. And so on.

The authors also address concerns over transition effects in real estate markets, agriculture, heavy industry, small business, exports, and banking, The transition would take no more than three years, with the decade to follow as one of unrivaled prosperity, full employment, and rapid economic growth.

The authors propose a return to the classic gold standard, defining the dollar to a fixed amount of gold: a position that Mr. Lipsky points out in his WSJ Op-Ed is really the middle-of-the road position.

Some people are all for Ben Bernanke and friends manipulating fiat currency. Extreme opponents favor the Hayekian approach of letting the market decide what money is, a view pushed by Ron Paul in recent years.

Why gold, you ask? The authors didn’t choose it. The market picked gold centuries ago. The yellow metal emerged as best for indirect exchange. It is after all, marketable, divisible, portable, stable in value, durable, recognizable, and homogenous. The perfect money.

The use of paper money is only continued under the boot of government force and coercion. If Romney takes the White House, he has the opportunity for government to be proactive and return peacefully to sound money. Not a Kabuki theater of stacking the commission with gold haters, but an honest consideration of sound money. If he (or someone else) doesn’t, the market will do it not so peacefully.

The blueprint was written 30 years ago. The Case for Gold deserves a real second chance.

Laissez Faire Books has printed this report in a new and beautiful edition. Every bit of the text applies today, even the last chapter on the path to reform. Had it been implemented back then, we could have avoided every economic calamity of the last 30 years. And it can still be implemented today. This second edition is not only handsome, but handy, and the $7.95 price can’t be beat.

Secure your copy of this book today. It’s about the future.

Doug French

Written By Doug French

Douglas French is a Senior Editor for Agora Financial. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles & Increases in the Money Supply, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine.