Lawson for Congress

It’s painful to hear people dismiss Ron Paul and say, “Oh, he’s that guy who wants to go back on the gold standard” while rolling their eyes. And before I really understood the history of our monetary system in the U.S., and indeed the world, I was one of them. Clearly, the gold standard failed, the 70s and early 80s were extremely painful, and who would want to go back to that mess?

But based upon his interviews (Ron Paul @ Google) and writings, such critics and Ron Paul are not talking about the same “gold standard”.

People equate the words “gold standard” with the currency system we’ve had since the Federal Reserve was established in the early 1900s, and more recently the Bretton Woods currency system that lasted from the post-WWII era until Nixon closed the “gold window” and ended foreign central banks’ convertibility of dollars into gold in 1971.

But the U.S. monetary systems that we’ve labeled “gold standards” in this country have all been destined for failure. Why? Because all the government did was fix the price of gold in dollars, without necessarily restraining the printing press that churns out Federal Reserve Notes. Essentially, we had a mechanism that allowed the government to “cheat” all along — while our Treasury publicly declared that the price of gold was *fixed* at a specific value in dollars, there was no absolute restraint to the Federal Reserve System printing paper money when we needed it (initially to finance wars, eventually both guns and butter). There are books about this topic, but this article does a pretty good job of hitting the historical high points (or low points — can you imagine the government confiscating all your gold today?)

The bottom line is that Ron Paul is not looking to return us to the “gold standard” as those words are widely interpreted. He is, as he says in the Google interview, “against the idea that government can print as much money as it wants” (to paraphrase).

Ultimately, money is trust. The prices of gold, gas, milk, butter, and even the price of US dollars against other (equally intrinsically useless) fiat currencies show that trust in our government and its monetary system is declining at an concerning rate. We can hide our heads in the sand, or we can ask if it’s possible to change the direction that we’re going.

Every central banker understands and professes that “sound money” is critical to economic growth. Like Ron Paul says, if money is one-half of every economic transaction, it’s your measuring stick for value. How effective would an architect be with a ruler that was always changing in length? But what central bankers don’t say is that the presence of a central bank that has a complete monopoly on a fiat currency driving a nation’s economy inherently undermines sound money as people accept the dogma that inflation is something that you “manage”, and deflation is something that you fear.

Inflation hurts savers, but benefits debtors. Savings lose their purchasing power, but debtors can pay back their loans in cheaper currency. But guess what — do banks make more money from savers, or debtors? And why must we fear deflation? Is it a bad thing that a computer today is cheaper than it was a decade ago?

What Ron Paul *does* want to do is legalize competition in the domestic money supply. That’s a first step towards providing sound money that rewards production, savings, and investment, as opposed to artificially stimulating debt, consumption, and speculation.

So what is a “real” gold standard? It’s simply where the government (or any institution) provides a currency that is convertible into a specified quantity of gold (or silver, or whatever commodity you like) without artificially fixing the commodity’s price. In other words, the government can’t just “talk the talk”, it must “walk the walk”. Because if the government provides convertibility between paper money (or zeros in your checking/savings account) and a commodity WITHOUT fixing the price of the commodity, the purchasing power of that money in terms of that commodity will be preserved forever.

In other words, in the Roman empire, the price of a nicely-tailored suit was an ounce of gold. Give or take a bit, that same ounce of gold today will still buy you a nice suit (in Hong Kong, even a custom tailored one!)

But I can still hear someone asking now… “But wait, why would we want our currency tied to the value of a commodity as volatile as gold?” Of course, gold would not be nearly as volatile if it was priced in gold :). Extreme volatility exists because gold is priced in our fiat currency that is subject to credit expansion, credit contraction, liquidity booms, busts, and all sorts of speculative excesses.

Indeed, while gold today is close to its peak in non-inflation-adjusted dollars, in inflation-adjusted terms, the price of gold is still MUCH lower than its peak since the dollar’s purchasing power is so much less today. As mentioned in the article above, the 1980 peak gold price in 2006 inflation adjusted dollars was over $2,000. So much for a sound currency.

This entry was posted on Sunday, August 12th, 2007 at 4:06 am and is filed under Ron Paul, gold standard, monetary reform. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.