- As with all matters of investment, everything is clear
in hindsight. Had you bought gold mutual funds earlier this year, they
might have appreciated more than 100 percent. Gold has risen $60 since
March 2001 to the latest spot price of $326.
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- Why wasn't it obvious? The Fed has been inflating the
dollar as never before, driving interest rates down to absurdly low levels,
even as the federal government has been pushing a mercantile trade policy,
and New York City, the hub of the world economy, continues to be threatened
by terrorism. The government is failing to prevent more successful attacks
by not backing down from foreign policy disasters and by not allowing planes
to arm themselves.
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- These are all conditions that make gold particularly
attractive.
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- Or perhaps it is not so obvious why this is true. It's
been three decades since the dollar's tie to gold was completely severed,
to the hosannas of mainstream economists. There is no stash of gold held
by the Fed or the Treasury that backs our currency system. The government
owns gold but not as a monetary asset. It owns it the same way it owns
national parks and fighter planes. It's just another asset the government
keeps to itself.
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- The dollar, and all our money, is nothing more and nothing
less than what it looks like: a cut piece of linen paper with fancy printing
on it. You can exchange it for other currency at a fixed rate and for any
good or service at a flexible rate. But there is no established exchange
rate between the dollar and gold, either at home or internationally.
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- The supply of money is not limited by the amount of gold.
Gold is just another good for which the dollar can be exchanged, and in
that sense is legally no different from a gallon of milk, a tank of gas,
or an hour of babysitting services.
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- Why, then, do people turn to gold in times like these?
What is gold used for? Yes, there are industrial uses and there are consumer
uses in jewelry and the like. But recessions and inflations don't cause
people to want to wear more jewelry or stock up on industrial metal. The
investor demand ultimately reflects consumer demand for gold. But that
still leaves us with the question of why the consumer demand exists in
the first place. Why gold and not sugar or wheat or something else?
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- There is no getting away from it: investor markets have
memories of the days when gold was money. In fact, in the whole history
of civilization, gold has served as the basic money of all people wherever
it's been available. Other precious metals have been valued and coined,
but gold always emerged on top in the great competition for what constitutes
the most valuable commodity of all.
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- There is nothing intrinsic about gold that makes it money.
It has certain properties that lend itself to monetary use, like portability,
divisibility, scarcity, durability, and uniformity. But these are just
descriptors of certain qualities of the metal, not explanations as to why
it became money. Gold became money for only one reason: because that's
what the markets chose.
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- Why isn't gold money now? Because governments destroyed
the gold standard. Why? Because they regarded it as too inflexible. To
be sure, monetary inflexibility is the friend of free markets. Without
the ability to create money out of nothing, governments tend to run tight
financial ships. Banks are more careful about the lending when they can't
rely on a lender of last resort with access to a money-creation machine
like the Fed.
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- A fixed money stock means that overall prices are generally
more stable. The problems of inflation and business cycles disappear entirely.
Under the gold standard, in fact, increased market productivity causes
prices to generally decline over time as the purchasing power of money
increases.
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- In 1967, Alan Greenspan once wrote an article called
Gold and Economic Freedom. He wrote that:
-
-
- An almost hysterical antagonism toward the gold standard
is one issue which unites statists of all persuasions. They seem to sense
- perhaps more clearly and subtly than many consistent defenders of laissez-faire
- that gold and economic freedom are inseparable, that the gold standard
is an instrument of laissez-faire and that each implies and requires the
other This is the shabby secret of the welfare statists' tirades against
gold. Deficit spending is simply a scheme for the confiscation of wealth.
Gold stands in the way of this insidious process. It stands as a protector
of property rights.
-
-
- He was right. Gold and freedom go together. Gold money
is both the result of freedom and its leading protector. When money is
as good as gold, the government cannot manipulate the supply for its own
purposes. Just as the rule of law puts limits on the despotic use of police
power, a gold standard puts extreme limits on the government's ability
to spend, borrow, and otherwise create crazy unworkable programs. It is
forced to raise its revenue through taxation, not inflation, and generally
keep its house in order.
-
- Without the gold standard, government is free to work
with the Fed to inflate the currency without limit. Even in our own times,
we've seen governments do that and thereby spread mass misery.
-
- Now, all governments are stupid but not all are so stupid
as to pull stunts like this. Most of the time, governments are pleased
to inflate their currencies so long as they don't have to pay the price
in the form of mass bankruptcies, falling exchange rates, and inflation.
-
- In the real world, of course, there is a lag time between
cause and effect. The Fed has been inflating the currency at very high
levels for longer than a year. The consequences of this disastrous policy
are showing up only recently in the form of a falling dollar and higher
gold prices. And so what does the Fed do? It is pulling back now. For the
first time in nearly ten years, some measures of money (M2 and MZM) are
showing a falling money stock, which is likely to prompt a second dip in
the continuing recession.
-
- Greenspan now finds himself on the horns of a very serious
dilemma. If he continues to pull back on money, the economy could tip into
a serious recession. This is especially a danger given rising protectionism,
which mirrors the events of the early 1930s. On the other hand, a continuation
of the loose policy he has pursued for a year endangers the value of the
dollar overseas.
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- How much easier matters were when we didn't have to rely
on the wisdom of exalted monetary central planners like Greenspan. Under
the gold standard, the supply of money regulated itself. The government
kept within limits. Banks were more cautious. Savings were high because
credit was tight and saving was rewarded. This approach to economics is
the foundation of a sustainable prosperity.
-
- We don't have that system now for the country or the
world, but individuals are showing their preferences once again. By driving
up the price of gold, prompting gold producers to become profitable again,
the people are expressing their lack of confidence in their leaders. They
have decided to protect themselves and not trust the state. That is the
hidden message behind the new luster of gold.
-
- Is a gold standard feasible again? Of course. The dollar
could be redefined in terms of gold. Interest rates would reflect the real
supply and demand for credit. We could shut down the Fed and we would never
need to worry again what the chairman of the Fed wanted. There was a time
when Greenspan was nostalgic for such a system. Investors of the world
have come to embrace this view even as Greenspan has completely abandoned
it.
-
- What keeps the gold standard from becoming a reality
again is the love of big government and war. If we ever fall in love with
freedom again, the gold standard will once more become a hot issue in public
debate.
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- http://www.lewrockwell.com/rockwell/whygold.html
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