For quite some time, Tom Friedman of the New York Times has been harping about the enormous subsidies that we are providing to our Middle Eastern Islamofascist and other enemies in the form of exorbitant oil prices that finance their worldwide terror activities and the armaments that are killing Americans in Iraq, not to mention the intimidating tactics of anti-American regimes like Venezuela. He has coined the First Law of Petropolitics, which states that the price of oil and the pace of freedom always move in opposite directions. He is right, of course, about the problem. But his solutions—increased taxes, higher “extraction fees”, coerced oil conservation, etc.—are flawed.
A much better idea comes from Steve Forbes. He asks us to imagine the huge setback to our enemies if the price of oil were to return to the $25-30 per barrel range. What would be required to accomplish this? Return to the days of dollar linkage to gold. Forbes notes that, from the mid-1940’s to 1971, the price of oil barely fluctuated. Then came the inflationary 1960’s followed by the severance of the dollar’s formal tie to gold in 1971, which has been primarily responsible for the disruptive oil price volatility since then, exacerbated by inconsistent Federal Reserve money supply policy.
No less an authority than former Federal Reserve Chairman Alan Greenspan has pointed out to Grant’s Interest Rate Observer that American price levels registered little change between 1800 and 1929, and he seems to agree with the need for gold constraints when he remarked that “monetary policy, unleashed from gold convertibility (in 1933), had allowed a persistent over issuance of money.”
Forbes believes, and I agree, that a return to dollar-gold linkage would stabilize the dollar price relationship of oil to gold, moderate the disruptive oil price shocks to our economy, and severely curtail the capabilities of our enemies around the world.