Return to the gold standard, not a bailout, will cure the nation’s economic ills

 By Peter  Duveen

Commentary

 PETER’S NEW 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 regime.

 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 coin—monetary contraction.

 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.