The Case For Gold
Dr. Ron Paul & Lewis Lehrman
Dr. Ron Paul & Lewis Lehrman
The Present Monetary Crisis
In 1784 in the debate over the money issue, Thomas Jefferson said: "If we determine that a dollar shall be our unit, we must then say with precision what a dollar is." Our Founding Fathers followed that advice and in 1792 the dollar was defined as 371Vi6 grains of silver. From 1792 until August 15, 1971 the dollar was defined as a precise weight of either silver or gold. Since 1971, the dollar has had no definition (officially the definition was not legally rejected until 1976); the advice of Thomas Jefferson has been rejected entirely. For more than 10 years the dollar has been nothing more than a piece of paper with government ink on it.
More and more Americans have come to recognize this, and a loss of confidence in the currency has paralleled this recognition. The monetary authorities say it is unnecessary to have a precise definition of the dollar, claiming: "A dollar is whatever it will buy." This being the case, and the fact that the dollar buys less every day, and approximately one-third of what it bought in 1971, the dollar today is undefinable, and its value is relative. It should be obvious that this loss of definition of what the monetary unit is, is directly related to the financial and economic problems we face today.
If the dollar served as the unit of account for a single South American nation, such as Chile or Brazil, the significance of this change from a precise definition to no definition would be less. However, since World War II the dollar has been the international currency of account, used throughout the world, and held as a reserve currency by most major western nations. Even though this was done unwisely, it worked temporarily up until 1971 when the definition of the dollar was changed.
Until 1971 a dollar was Vss of an ounce of gold, and all nations that held the dollar as a reserve were assured that their dollars could be redeemed for V35 of an ounce of gold—even if American citizens were denied that same right. However, the failure of the U.S. government over many decades (Congress, the Federal Reserve, and the administration) to issue only dollars that could be redeemed led to a massive inflation of the money supply for various political reasons. This forced the United States to default on its convertibility pledge and the dollar became only something the government claimed it was. Residual trust and blind faith have allowed the dollar to serve since 1971 as money, but with ever increasing difficulty. Understanding Jefferson's advice about a precise definition of the dollar, and analyzing the problems of
the last decade, during which time we have had no definition of the dollar, are crucial in our attempt to pave the way for a sound, honest, and reliable monetary system.
From 1792 to 1971 we had an imperfect money and banking system, as will be shown in chapters two and three. But during that time the dollar was always related to gold in one way or another. (It may be argued that the exception was the greenback era during the Civil War, but even then gold circulated and was used to some degree.) Even with its obvious imperfections, the gold dollar worked rather well compared with the past 10 years. Though the Depression of the 1930s was ushered in by government meddling in the economy and irresponsible money management, the gold dollar per se survived, even though debased by 41 percent. Today the dollar is troubled by a general lack of confidence. The market is anticipating that a steady depreciation will continue, thus prompting high interest rates. The purchasing power of the dollar as compared with gold has dramatically decreased over the past decade. By historic analysis, it is clear that 1971 was a significant and unique year in American monetary history.
This being the case, what in particular occurred on August 15, 1971? It was on this day President Nixon ''closed the gold window/' which meant that officially the American government would no longer honor its promise to foreign holders of dollars to redeem those dollars in gold. It became policy what was already known through the world, that the American government had created many more dollars—promises to pay—than it should have and no longer could live up to its monetary commitments by redeeming them in gold. A new agreement, the Smithsonian agreement, which lasted only 14 months, was claimed by President Nixon to be "the most significant monetary agreement in the history of the world/' promising it would create jobs, restore financial stability, help the farmers, stimulate exports, and bring prosperity to all. "Significant" it was, but in an entirely different way, for it was this agreement that ushered in the present period of fiat paper money and monetary chaos. It has brought us the exact opposite of what was intended.
In his statement in 1971 President Nixon, as many uninformed individuals do today, blamed "speculation" for our problems and not the real culprit—government inflation. He further stated on that fateful day "that the effect of this action, in other words, will be to stabilize the dollar." How can we expect those who claimed that rejecting a gold-related dollar would "stabilize the dollar" to advise us now on solving our current financial and monetary crisis? We cannot, because hey are not capable. It is necessary to look elsewhere for the solution. Even though the declaration made in August 1971 was of great significance, overall monetary policy did not change at that particular time. This was essentially an admission of the failure of the Federal Reserve's discretionary monetary policy it had followed in various forms since 1914. Although previous deflations (particularly 1929 and 1932), and the fact we were spared from the physical destruction of World War II, prolonged the life of the dollar, the inevitable failure of
discretionary policy was known by many for a long time. When the record of the past 10 years is examined, it is clear that indicting the monetary arrangements of the past decade is justified. It
is clear that discretionary monetary policy, without any assistance from gold, leads to serious economic instability, lack of capital formation, high interest rates, high price inflation, and intolerably high levels of unemployment. The climax of this policy came in October 1979 when the Federal Reserve was forced to change some of its management techniques. Due to international pressure, weakness of the dollar, gold at $600 an ounce, and silver over $25 an ounce, the Federal Reserve adopted a policy directed toward concentrating more on money supply than on interest rates. Monetarism was to be given a chance at solving the problems of inflation. The record from 1979 to the present offers no real hope and in many ways confirms the contention by many that the only solution will come when we have a redeemable currency.
The money supply since 1971 has been growing at unprecedented rates. Since inflation is an increase in the supply of money and credit, this is of critical importance. It tells us what many economic historians knew even before 1971, that when government is granted an unlimited power to create money out of thin air as the Federal Reserve has, that power is always abused. For various political reasons, excessive money is always created, bringing only trouble to the innocent citizens not receiving the "benefits" of inflation. It is tempting to pursue inflationary policies, since during all stages of inflation special interest groups benefit at the expense of others. History shows this temptation has never been resisted and the record of the money growth of the past decade confirms this to still be the case.