Tuesday, November 18, 2008
Not to be overshadowed by the recent blitz of calls for a new gold standard, Walker Todd, an economic consultant at the Federal Reserve Banks of New York and Cleveland writes in the Christian Science Monitor that, without one, we might be headed straight toward hyperinflation.
If anyone can think of a suitable metaphor that would help to describe the recent rush of economists to once again embrace the yellow metal, please feel free to scribble it out in the comments section below.
At the moment, all I can think of is a clean and sober version of professional golfer John Daly who, for years, claimed he could handle his drinking, but then keeps winding up with a new 3 AM mug shot after a drunken bar brawl, passing out, or a combination of the two.
Forget Bretton Woods II – we need a gold standardA new gold standard is becoming a crowded trade, that is, everywhere except in the gold futures market.
Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, apallingly, the government's rescue attempt is built on more credit and even easier money. That's like giving a procrastinator a deadline extension. By choosing this course, Washington has steered us on to the "road to Weimar" – the road to runaway inflation.
It didn't have to come to this. And it still doesn't. But the proper remedy will take tremendous political courage: Bring back the gold standard. That, more than any byzantine regulations that emerge from the Bretton Woods II conference this weekend, would provide stability and safety for nations and individuals around the world.
Anna J. Schwartz, who co-wrote with Milton Friedman the highly influential book, "A Monetary History of the United States: 1867-1960," suggested at a 2004 gold conference at the American Institute for Economic Research that only a crisis of sufficient depth and magnitude would provoke the public to demand the stability of gold or a gold-linked currency. Such a crisis, which appeared remote at the time, may soon be upon us.
Some critics worry that a return to gold would make credit harder to come by. It's true that the kind of ultra-loose credit that fuels housing bubbles would be marginalized, but normal credit in a gold system would tend to be cheaper because concerns about the future value of repayments are diminished.
America faces a stark choice. The path back to a gold standard is rocky and uphill. The current inflationary path is slippery and downhill. One leads to integrity and stability. The other could lead to financial ruin. Which will we choose?