In the December issue of Flourishing (our print newsletter) you'll find an article entitled A Gold-Backed Dollar and the Law of the Excluded Middle. In that article I tried to make the briefest possible case for a return to the "gold-standard".
I was subsequently encouraged to find an op-ed in the NY Times by the brilliant James Grant*, following a similar theme. I encourage you to follow this link to read the entire article.
Today, the Fed's hundreds of Ph.D.'s conduct research at the frontiers of economic science. "The Two-Period Rational Inattention Model: Accelerations and Analyses" is the title of one of the treatises the monetary scholars have recently produced. "Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering" is another. You can't blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.
If only they gave it some thought, though, the economists - nothing if not smart - would fairly jump at the chance for counter duty. For a convertible currency is a sophisticated, self-contained information system. By choosing to hold it, or instead the gold that stands behind it, the people tell the central bank if it has issued too much money or too little. It's democracy in money, rather than mandarin rule.
...To reinstitute a modern gold standard today would take time, too. The United States would first have to call an international monetary conference. A chastened Ben Bernanke would have to announce that, in fact, he cannot see into the future and needs the information that the convertibility feature of a gold dollar would impart.
That humbling chore completed, the delegates could get down to the technical work of proposing a rate of exchange between gold and the dollar....
Other countries, thunderstruck, would then have to follow suit. The main thing, Mr. Bernanke would emphasize, would be to create a monetary system that synchronizes national economies rather than driving them apart.
If the classical gold standard in its every Edwardian feature could not, after all, be teleported into the 21st century, there would be plenty of scope for adaptation and, perhaps, improvement. Let the author of "The Two-Period Rational Inattention Model: Accelerations and Analyses" have a crack at it.
My long-distance economics professor, George Reisman, PhD., has offered several ideas for returning to a gold standard over the many years that I've followed his work. In his book, Capitalism: A Treatise on Economics, Dr. Reisman makes hundreds of references to the gold standard, and in fact, a return to a gold standard is a recurring theme. You can access a searchable PDF of Capitalism here: http://www.capitalism.net/ Capitalism /CAPITALISM_Internet.pdf.
In case you're wondering, I'm making a big deal of this, because I expect to see more proposals for a return to a gold standard emanating from Washington, D.C. and elsewhere in coming months. You are now forewarned. Until next week,
PATIENCE, DISCIPLINED, and CONFIDENCE in the FUTURE! mh
* How to Make the Dollar Sound Again, The New York Times, Nov 13, 2010. James Grant, the editor of Grant's Interest Rate Observer, is the author of Money of the Mind.
