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Title: GOP Longshot [Ron Paul]: Ditch Fed, Go Back to Gold
Source:
The Street.com
URL Source: http://www.thestreet.com/markets/commodities/10363490.html
Published: Jun 19, 2007
Author: By Simon Constable
Post Date: 2007-06-19 21:48:07 by DeaconBenjamin
Keywords: None
Views: 219
Comments: 14
Anyone planning a long career at the Federal Reserve better think again if Republican presidential hopeful U.S. Rep. Ron Paul makes it to the White House in 2008. Paul (R., Texas) is so disgusted with the Fed and its role in failing to stem inflation that he wants to eliminate the entire institution, including its army of economics Ph.D.s and other money wizards. In its place, he proposes returning to a system of money abandoned more than three decades ago, after slowly falling out of favor for much of the 20th century: the gold standard, or backing paper currency with bars of the precious metal. "Once you have a central bank [like the Fed] , they can't resist the temptation to create excessive volumes of money," says Paul, a longshot for the GOP nomination who leapt into the limelight earlier this year when he clashed in a debate with former New York City Mayor Rudy Giuliani over past U.S. foreign policy actions in the Middle East. "And the consequence [of printing money] is rising prices or inflation." Axing the Fed and introducing a new monetary regime is Paul's answer to what he sees as unsustainable fiscal imbalances and inflationary pressures in the U.S. economy. (For a video on this topic click here.) Because no personnel appointments at the Fed would satisfy him -- no matter how hawkish on inflation they might be -- he says it's just better to do away with the institution. The new money system would involve competing private banks like American Express (AXP) issuing their own paper money backed by gold bars, Paul said. Holders of paper currency could redeem the notes for gold at the issuing bank or exchange them for notes printed by different institutions. The idea of the gold standard is neither new, nor without merit. It had its heyday in the 19th century with Britain's Bank of England at the center of the financial world order. Under the system, each country's money supply expanded or contracted depending on how much gold its monetary authority held. Because there is little or no flexibility to the arrangement, money can't be created at government's discretion, keeping inflation in check. For all its merits, however, the system broke down around the advent of World War I. Repeated tries at keeping a gold standard were made, but each eventually failed, most recently in 1971 when President Richard Nixon made the decision to leave the system. While the gold standard's inflexibility is often touted as a strength, others view it as a hindrance to economic growth. "Under the traditional gold standard, you have fixed exchange rates and free mobility of capital, but you give up domestic monetary policy," says Robert Wright, professor of economic history at New York University's Stern School of Business. "That's why the 19th century is the heyday of the financial panic." Or in other words, the absence [?!] of a central bank like the Fed would leave the government with few tools to stop a market crash turning into a real depression. Another problem Wright points to is the phenomenon of falling nominal wages. Many of the conflicts between labor and factory owners in the 1800s had more to do with adjusting workers' wages downward in line with the overall price level than they did with owner-inspired greed, as is popularly perceived, he says. Even so, salary cuts are not something most Americans would readily accept today. Another practical consideration is where to set the gold price. Set it too low, and the mining industry could start hurting. That's what happened last time when the price was set at $35 an ounce, explains Jeff Christian, managing director of New York-based specialty commodities firm CPM Group. That may go a long way to explaining opposition to Paul's plan from a very unlikely source: the gold industry itself. "I believe that a return to a gold standard for the U.S. is [neither] advisable nor practical," says Pierre Lassonde, chairman of the World Gold Council and former president of Newmont Mining (NEM). "The best way for people to protect themselves worldwide against inflation or deflation is by owning gold directly through a gold [exchange-traded fund]," such as streetTracks Gold Shares (GLD). Although Lassonde doesn't elaborate, one other problem might be the lack of gold itself. If the $5 trillion of global central bank reserves was backed by the 1 billion ounces of gold they owned, then the price would end up at $5,000 an ounce, vs. around $650 an ounce today, explains CPM's Christian. Christian adds that Paul's proposal also plays directly into the hands of those who believe in conspiracies -- especially if the mechanics of the system are left to private banks. "If the government gave over the management of the currency to the banks, then the conspiracy theorists would have a field day," says Christian, as now they'd have "evidence" that the banks had the government in their pocket. And even those who believe that the problems of a gold standard can be worked out say that the political realities of U.S. politics mean that only the brave or foolhardy would raise the issue. Michael Darda, chief economist at MKM Partners in Greenwich, Conn., says Paul may have achieved the best he could hope for as a minor candidate: getting the topic of monetary policy into the wider debate. "It's really too bad, but nobody is going to touch it," Darda laments. "There is a definite place for it in the monetary system." you give up domestic monetary policy -- Like the EU? the absence of a central bank like the Fed would leave the government with few tools to stop a market crash turning into a real depression. -- which is why the existence of the FED made the "Great Depression" the worst depression in US history. the phenomenon of falling nominal wages. -- which is accompanied by falling costs, as the presence of a hard money system produces mild deflation, thereby creating incentives for saving, and reducing incentives for borrowing (the opposite from constant inflation). If the $5 trillion of global central bank reserves was backed by the 1 billion ounces of gold they owned, then the price would end up at $5,000 an ounce, vs. around $650 an ounce today, explains CPM's Christian. Define central bank reserves. In Switzerland, 41 percent of the reserves are gold.
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#1. To: DeaconBenjamin (#0)
This is a case of "great idea, wrong audience". Face it, the American sheeple will NEVER, EVER go for a return to the gold standard. They're FAR too STOOPID to even begin to consider it. Once a couple of the Fed boyz start spreading some FUD (Fear, Uncertainty and Doubt) around this idea, it'll be dead before it gets two steps out of the gate. No, first we have to experience the joys of hyperinflation, and then, maybe, we might be able to return to the gold standard. Not before then. The only way to learn up the deeply stupid is with severe pain.
 | Capitalism is NOT an economic system, it's a RELIGION for ASSHOLES! |
#2. To: DeaconBenjamin (#0)
Thank you. I need at least one good laugh a day, and this certainly turned the trick!
than they did with owner-inspired greed,
The Light travels faster than sound. This is why some people appear bright until you hear them speak.
#3. To: Elliott Jackalope (#1)
Capitalism is NOT an economic system, it's Capitalism is NOT an economic system, it's a RELIGION for ASSHOLES!
a THE RELIGION for ASSHOLES COMMUNIST ASSHOLES!
The Light travels faster than sound. This is why some people appear bright until you hear them speak.
#4. To: DeaconBenjamin (#0)
Absolutely stupid, or lying, statement by CPM Christian. In order for gold to be a "standard" the price must be pegged. Otherwise it is just another commodity whose price fluctuates wildly with the current value of any currency buying or selling it. Absolutely worthless as a storehouse and constraint ( standard) in that case. All you have here is some folks who own some gold trying to jawbone the price up a bit before it falls back where it traditionally lies. Look at the return on gold for the last 100 years and go cash in your retirement, sell your house, rent out your wife and buy all your heart desires. You just might want to go to http://Vanguard.com and look at the historical pricing of VPMCX before you do.
If the $5 trillion of global central bank reserves was backed by the 1 billion ounces of gold they owned, then the price would end up at $5,000 an ounce, vs. around $650 an ounce today, explains CPM's Christian.
#5. To: JCHarris (#4) (Edited)
I think the below might begin to answer the first part of your question. It's from Murray N. Rothbard's "The Case for a Genuine Gold Dollar", a little over halfway down: http://www.mises.org/rothbard/g enuine.asp ========================================= A corollary criticism, and a favorite of monetarists, asks why gold standard advocates would have the government "fix the (dollar) price of gold" when they are generally opposed to fixing any other prices. Why leave the market free to determine all prices except the price of gold? But this criticism totally misconceives the meaning of the concept of price. A "price" is the quantity exchanged of one commodity on the market in terms of another. Thus, in barter, if a package of six light bulbs is exchanged on the market for one pound of butter, then the price per light bulb is one-sixth of a pound of butter. Or, if there is monetary exchange, the price of each light bulb will be a certain weight of gold, or, these days, numbers of cents or dollars. The important point is that price is the ratio of quantities of two commodities being exchanged. But if money is on a gold standard, the dollar and gold will no longer be two independent commodities, whose price should be free to fluctuate on the market. They will be one commodity, one a unit of weight of the other. To call for a "free market" in the "price of gold" is as ludicrous as calling for a free market of ounces in terms of pounds, or inches in terms of yards. How many inches equal a yard is not something subject to daily fluctuations on the free or any other market. The answer is fixed eternally by definition, and what a gold standard entails is a fixed, absolute, unchanging definition as in the case of any other measure or unit of weight. The market necessarily exchanges two different commodities rather than one commodity for itself. To call for a free market in the price of gold would, in short, be as absurd as calling for a fluctuating market price for dollars in terms of cents. How many cents constitute a dollar is no more subject to daily fluctuation and uncertainty than inches in terms of yards. On the contrary, a truly free market in money will exist only when the dollar is once again strictly defined and therefore redeemable in terms of weights of gold. After that, gold will be exchangeable, at freely fluctuating prices, for the weights of all other goods and services on the market." ==================================================
Rivers of blood were spilled out over land that, in normal times, not even the poorest Arab would have worried his head over." Field Marshal Erwin Rommel
#6. To: historian1944 (#5)
Amazing this country was able to exist before private banks were allowed to operate our money system, simply amazing.
what a gold standard entails is a fixed, absolute, unchanging definition as in the case of any other measure or unit of weight.
#7. To: Cynicom (#6)
We're so far removed from that now that it's really hard to grasp how it must have worked (even though peoples we would call primitives dealt with the system). I've been reading Rothbards "Man, Economy and the State" and he goes through direct exchange in great detail using horses and barrels of fish, and continuing until the farmer gets into a situation where his plow isn't divisible into parts (can't sell a foot of the plow in exchange for a dozen eggs) which leads into indirect exchange. His progression, though laborious, does make indirect exchange much more understandable, and the book's path doesn't require a bank to facilitate the exchange. The largest point he makes is that some commodity will eventually be chosen to facilitate the exchange, independent of any government involvement.
Rivers of blood were spilled out over land that, in normal times, not even the poorest Arab would have worried his head over." Field Marshal Erwin Rommel
#8. To: historian1944 (#7)
I am old enough to remember well when people performed their own exchanges, without government participation. Small scale indeed and experts would scoff at its very concept but their arrogance blinds them to the fact that a medium was fixed. Most people find it appalling that our government is unable to manage our financial system but allow it to be done by private banks.
some commodity will eventually be chosen to facilitate the exchange, independent of any government involvement.
#9. To: DeaconBenjamin (#0)
Define central bank reserves. In Switzerland, 41 percent of the reserves are gold. That's interesting.
If the $5 trillion of global central bank reserves was backed by the 1 billion ounces of gold they owned, then the price would end up at $5,000 an ounce, vs. around $650 an ounce today, explains CPM's Christian.
Ron Paul for President
#10. To: Cynicom (#8)
Isn't that the beauty of having a commodity based system of exchange? A local bank, or a refiner, or a guy with a crucible in his backyard can make a coin, (say .5 oz gold) and the receiver can with very rudimentary tools verify it is what it says, and accept it in an exchange and then use it again. No government or bank is required, and it doesn't have to say legal tender on it. I like the idea of having the government out of the business of printing money, and I'm sympathetic to Rothbard's 100% reserve banking system. He talks of the fractional reserve grain elevator in his book "The Case Against the Fed" and there were actually laws enacted to prevent grain elevators from selling more than than they had, and even though a bank is essentially the same type of service, the rules are different for them.
Rivers of blood were spilled out over land that, in normal times, not even the poorest Arab would have worried his head over." Field Marshal Erwin Rommel
#11. To: historian1944 (#10)
This debt is on the backs of the citizens. The Fed Res is off scot free.
U.S. National Debt Clock is now $8,820,537, 025,126 as of May 31, 2007.
#12. To: Cynicom, Diana., historian1944, FormerLurker (#6)
Absolute, unchanging, fixed....the Gold Standard... its failure built into the definition... a rigid and locale-centric "system" which proved ridiculous in the face of growing populations and technology.... rigid in the uselessness of the hoards of the hoarders and stinking rich, usurers' rich.... technology and achievement, new thoughts emanating from fertile minds, that increased ideas, productivity, products and increased standards of living and creature comforts for everyone, not the few, with respect to both goods and services collapsed because of a millstone around the neck of the 99% of the people who could NOT HORDE!!... ... the much-vaunted "Gold Standard" which had brought monetary ruin to otherwise viable nations for 5000 years.... the much-vaunted "Gold Standard" not a creation of the new United States, but of previous Empires, crushed by the stagnation and proudly proclaimed profundity of the few Luddites who always demanded the ill-conceived and rigidly-defined, stultifying, greed-breeding fantasy of the "Gold Standard". The profundity of this "Gold Standard" exists only in the failures documented by history and the fantasies of the few. The so-called gold standard has never , and never will, produce anything but a concentration of the very rich at the expense of the other productive 99%...never has been and never will be able to keep up with the exigencies of growth for a prosperous mankind, freed from the death struggle for mere survival and serfdom. There are other ways of thinking that may replace fiat currency....but it is NOT the failed gold standard.
what a gold standard entails is a fixed, absolute, unchanging definition as in the case of any other measure or unit of weight.
#13. To: JCHarris (#12)
Uhhh..After nearly 100 years of the Fed Rer we have what??? One per cent of the population controlling over half of the wealth. The horse needs to be ahead of your wagon JC, not behind it.
produce anything but a concentration of the very rich at the expense of the other productive 99%.
#14. To: Cynicom (#13)
One per cent of the population controlling over half of the wealth. Higher standard of living for the people... the Gold Standard had 90% of the wealth in 1 % of the pockets.
Uhhh..After nearly 100 years of the Fed Rer we have what???
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