Tuesday, November 16, 2010

James Grant on How to Make the Dollar Sound Again

Saturday's New York Times featured James Grant's excellent op-ed explaining what he would do to to recovering a sound dollar. (Hint: it does not include quantitative easing). He calls for a return to the gold standard. Notwithstanding official unpopularity of the idea, Grant makes a lot of sense and his analysis is well worth reading.

Grant makes one great point after another with his snappy prose. He notes that the classical golds standard was one of the most stable monetary systems we've had in history. He notes how simple it is to maintain. He notes that the pure paper money era is relatively recent, beginning in 1971. He notes that even the Fed was originally on an international gold standard. He even identifies some of the titles of irrelevant research pursued by Federal Reserve economists. Finally, and most importantly, he explains that under an honest gold standard, government bankers do not need to be clairvoyant, which is a good thing, because they can't be.

As Grant explains,

The intended consequences of this intervention include lower interest rates, higher stock prices, a perkier Consumer Price Index and more hiring. The unintended consequences remain to be seen. A partial list of unwanted possibilities includes an overvalued stock market (followed by a crash), a collapsing dollar, an unscripted surge in consumer prices (followed by higher interest rates), a populist revolt against zero-percent savings rates and wall-to-wall European tourists on the sidewalks of Manhattan.

As for interest rates, they are already low enough to coax another cycle of imprudent lending and borrowing. It gives one pause that the Fed, with all its massed brain power, failed to anticipate even a little of the troubles of 2007-09.
A government managed gold standard would certainly not be perfect and would only be as good as the vigilance of the powers that be to maintain it. We did, after all, once have a gold standard and the state walked away from it. An even better alternative would be a free market in money production in which no single entity, such as the Federal Reserve, has the official monopoly in printing money, and in which banks are not allowed to create checkbook money out of thin air via fractional reserve banking. Still, a gold standard would be much better than we have now and might be a tremendous step in the right direction.

Nota Bene: Lew Rockwell who made me aware of Grant's op-ed on his blog, will have Grant as a guest on The Lew Rockwell Show tomorrow. The program will be available as a podcast.

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