A chorus of pundits, experts, and opinion pieces is growing around the need for a completely overhauled monetary and fiscal policy infrastructure for the country, and I say that we cannot move too fast to get about it.
Five senior fellows at Stanford University’s Hoover Institution, including former cabinet level government officials involved in fiscal and monetary policy, recently collaborated on an essay in The Wall Street Journal in which they wrote, “The next Treasury Secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States”, and went further to describe current problems that are so bad that they are “close to being unmanageable now, and if we stay on the current path they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis”.
One underlying current in this dialogue is the realization that a significant part of the problem is the U. S. system of fiat money, and this has moved talk of a return to the gold standard out of the shadows. In fact, the Republican Party platform includes a new provision that calls for a commission to examine “possible ways to set a fixed value for the dollar”, and this wasn’t added simply to appease the Ron Paul wing; there were some other serious thinkers pushing it as well. Steve Forbes believes that this issue and this commission will take on an importance over the next couple of years that will totally surprise the policy establishment, and for good reason. The world’s economic and political realms are in disarray, and the one indispensable nation in turning it around is the U. S., whose current policy structure and priorities are an abysmal example of leadership. Thoughtful and serious people know this and will take action to correct it.
I recently attended a forum sponsored by Hillsdale College which featured a panel on the history of and arguments for and against returning to a gold standard, and the arguments “for” were quite compelling. Given the daunting challenges described by the “five wise men of Stanford”, it seems to me that we cannot begin to address these problems unless we cease and desist in debauching the dollar, the world’s reserve currency, and defrauding the holders of dollar-denominated debt, and I am persuaded that the only way to protect us from these ravages is to anchor the dollar to an external standard of value that has historically served as a pricing signal for policy correction. Whether this means a return to something like the Bretton Woods model that governed the international monetary system from 1944 to 1971, I’m not sure, but we need to give this idea serious and urgent consideration.
Regardless of the outcome of the gold standard debate, there certainly should be a major restructuring of monetary policy as currently practiced by the Federal Reserve. Under Ben Bernanke, it has been a disaster. The continuing policy of “quantitative easing” and managing interest rate levels at close to zero has destroyed the reliability of the pricing mechanism for borrowing and lending money, which is essential for the proper evaluation of risk and financing economic growth. This has resulted in a misallocation of available credit toward government and large corporate entities, not the best sources of innovation and job creation. There are trillions of dollars available for lending, but the destruction of a credible pricing mechanism has distorted the market for available credit and introduced uncertainties for both borrowers and lenders. Then Fed Chairman Paul Volcker faced the same policy options in the early 1980s, but opted to manage the money supply and let market rates adjust accordingly, which, along with Reagan’s supply side fiscal policy, produced very high interest rates and a very painful, but short-term recession followed by a clearing of the markets, the defeat of inflation, and 20 years of solid economic growth.
We need a return to this discipline, and it begins with a commitment by the Federal Reserve, backed by Congress, to abandon its mission creep and return to its primary mission–the preservation of the value of the dollar. And a return to some form of a true gold standard would help make this possible.