Return to the gold standard, not a bailout, will cure
the nation’s economic ills
By Peter Duveen
YORK, Sept. 27, 2008—As Congress considers a bailout
package to stave off the collapse of the American financial system, it might do
well to remember that it was legislation it passed some 40 years ago that led
to the current crisis.
In 1965 and 1968, during the administration of President
Lyndon Johnson, Congress voted in two stages to remove the reserve requirements
for Federal Reserve notes. These requirements were that for every note issued,
there had to be 25 percent of its value in gold held in reserve. At the same
time, the value of the dollar was maintained at a price of $35 an ounce. These restraints
put some definite limits on what the Federal Reserve was able to do. If it
wanted to issue more currency, it had to bolster the nation’s gold reserves.
After Congress removed gold reserve requirements, the
Fed had no limits on the amount of currency it could issue. This was truly the end of the dollar as a
stable monetary unit. Nixon's abandonment of a fixed parity between gold and
the dollar was a direct result of the lifting of reserve requirements, even
though he is often blamed for a situation not of his own making.
The removal of reserve requirements paved a very
bumpy road that has led to the present economic debacle. The solution is not a
bailout, however, but a return to the gold standard. It is not a matter of nostalgia
for the good old days. It is a call for a return to a stable and honest monetary
Fiat currency such as is issued by the Fed does not
behave well as money. It has liabilities that are not curable. We are reaping
the results of these liabilities. One of them is that it cannot supply enough money
to the economy, because the monetary base is continually revalued downward.
This is what we call inflation, or—what is merely the other side of the same
Pundits have continually derided the gold standard
over the past 30 or 40 years. But a commodity standard such as the gold
standard is remarkable in that it allows the monetary base to expand while
keeping the purchasing power of the monetary unit stable. It is these two
characteristics that make a commodity standard such as the gold standard
attractive, and, in fact, indispensible to a well-functioning economy.
How do we get back to a gold standard? It's easy. Go
to the corner store, offer the proprietor to buy something with gold, and see
what he charges you. When you have completed the transaction, you and the
proprietor are on the gold standard. When this practice expands, a more
universal gold standard comes into being.
Money is really only a convenient form of barter, and
can never be more or less than that. The use of gold for this streamlined
barter system is a natural choice because of its various properties. Bank
notes, on the other hand, carry with them an additional element of risk that is
often unstated, but very real. They are mere promises to pay, and the promise
is often not kept. The difference between gold and a bank note is the
difference between a well-functioning monetary system and a scam, and a scam is
what our country has labored under since the removal of gold reserve
requirements in the 1960s.
Don't worry about the bailout. The only cure for our
ailing economy is a return to the gold standard. It could happen today.
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