My Thoughts On Lewis Lehrman's Gold Standard


November 17, 2011

(This item originally appeared at Forbes.com on November 17, 2011.)

http://www.forbes.com/sites/nathanlewis/2011/11/17/my-thoughts-on-lewis-lehrmans-gold-standard/


Introduction: In Robert Bartley's book The Seven Fat Years, he describes how the original "supply side" group used to meet at a restaurant called Michael I in lower Manhattan, and talk about their then-radical ideas. (Oddly enough, by total happenstance, I once had an office in that very building, and ate at Michael I a few times myself.) Bartley remembers the Michael I dinners as a genial meeting of like-minded people, but others who attended remember a more specific purpose. It was an opportunity for the participants to explain their viewpoints and work out a common ground. Politically, they had to form a consensus, to focus on what they could agree upon in common rather than the small differences in viewpoints that any such group of people would have. Today, we have two main branches of gold standard advocates in the United States: the "supply side" group, influenced by people like Robert Mundell and Arthur Laffer, and the "Austrian" group, influenced by Murray Rothbard. Chuck Kadlec, of the American Principles Project, is a member of the "supply side group," for example, having worked with Arthur Laffer for many years. Lewis Lehrman is a member of the "Austrian group," as is Ron Paul. Both collaborated with Murray Rothbard when they were members of the 1981 Gold Standard Commission, resulting in the book The Case For Gold, summarizing their arguments on the Commission.

In the past, these groups have been somewhat critical of each other. For example, Ron Paul is rather antagonistic towards the Federal Reserve, saying that it should be dissolved completely as too corrupt to build upon in the future. The "supply side" group tends to be much more accepting of existing institutions, not necessarily because they disagree with Ron Paul's arguments, but because they feel it would be easier to get there from here if you didn't have to remake everything from scratch. Both of these viewpoints have some merit -- in the end, you just have to make an informed decision and hope for the best. (After the events of the last few years, I have to admit that Ron Paul has a point.)

With that in mind, I thought it was time to make friends with the Austrian group, and agree on our common principles. I thought Lewis Lehrman's proposal was fine in its broad components. In fact, I would say that I agree with all of its main proposals. Indeed, in recent years, I think the "supply side" and "Austrian" groups have come a lot closer together fundamentally, so this is not just papering over hidden antagonisms. I hope Lewis doesn't mind that I will post here part of an email that he sent me after reading the item in Forbes.

Your very generous review of my short book was forwarded to me.  I deeply appreciate the time you took to read it.  I also respect your mastery of the subject.  I have always believed that we are allies in this important campaign for monetary reform.  Both of us are in this not to play, but to win.  I look forward to our collaboration in the future.
 
May I also say how useful I have found your book.  Professor Rueff, too, would have appreciated your generous inscription in my copy.
 
As ever,
With respect,
Lewis Lehrman


To return the nice compliments, I will also say that Lewis Lehrman has been leading this effort for several decades now, and we are lucky to have someone with his insight, experience and tenacity on our side. I also look forward to collaborating in the coming, exciting years.

* * *


Some people have been asking me what I think of the gold standard proposal by Lewis Lehrman, as expressed in his most recent book The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies.

For the most part, I think the plan is fine. He comes from a slightly different tradition than I do — I sense a strong helping of Jacques Rueff — and so uses terminology that might be a little unfamiliar, but for the most part I don’t see anything particularly troublesome.

In my view, a gold standard system must have two basic elements.

FIRST: It should have a goal, or a policy target. In the case of a gold standard system, the policy target is to create a currency whose value is fixed to gold. The broader policy goal is to create a currency of stable value, free of human manipulation. In practice, a gold value link has been the most effective way of achieving this goal.

SECOND: It should have an effective means of accomplishing this goal. Obviously, hopes and wishes alone will not suffice. In practice, this means some sort of supply adjustment mechanism.

However, within that framework, we can have a great many variations. As an analogy, we could consider the automobile. An automobile should have four wheels (usually) and some sort of motor to power the vehicle. And it should actually work, with all the engineering details that implies.

But, in real life, there is no such thing as a generic “automobile.” There are only specific automobiles, each with their own characteristics and design compromises. One might be a very good offroad vehicle. Another might get great gas mileage. Another might be very luxurious, and another might carry lots of passengers. You can adjust the specifics of your “automobile” to address your own set of needs and concerns.

In a similar way, every gold standard system is also idiosyncratic. In 1900, the Bank of England had a monopoly on currency issuance, while in the United States, thousands of independent banks issued currency, within the framework of the National Bank system. France and Russia held very large gold reserves – 544 and 661 metric tons, respectively – while Germany had rather small bullion holdings, relative to the size of the economy, of only 168 tons. They all worked.

Naturally, any group of people would have slight differences in the elements of their gold standard proposal that they focus on. One person wants a very fast and sexy car, but another person wants lots of space for luggage. Some people today think it is very important to abolish the Federal Reserve – we got along without it until 1913 — while others are comfortable with existing institutions.

These can all be reasonable proposals within the context of a gold standard system. You can have a system with redeemability or without, with 100% gold reserves or no gold reserves at all, with or without gold coins in circulation.

Following a rhetorical tradition including various “100%” or “pure” gold standard proposals — we haven’t had a “24 karat gold standard” yet but it is just a matter of time — Lehrman calls his system the “true” gold standard, as if there is only one. However, Lehrman’s “true” gold standard is fairly similar, in my view, to gold standard systems that actually existed around the late 19th century.

The label also serves to distinguish his proposal from the goofy nonsense out there with a “gold standard” label, but which does not meet either of our two necessary conditions. This includes a lot of drivel pumped out by the Keynesian economists in academia, who often amuse themselves by inventing some sort of ridiculous proposal, attach a “gold standard” label to it, and then proceed to explain that it is ridiculous.

Lehrman places a lot of focus on the notion of international reserve currencies. Even the title states, “A Monetary Reform Plan Without Official Reserve Currencies.” This is a reasonable area of concern, because one reason we don’t have a gold standard today is that the Bretton Woods system of 1944-1971 was based around using the U.S. dollar as a reserve asset. All major countries had a gold standard system, but it was designed so that the U.S. dollar was pegged to gold, and other countries’ currencies were fixed to the dollar. In other words, they had U.S. dollars (actually Treasury bonds) as the reserve asset, not gold bullion.

Thus, when the dollar’s gold link was severed in 1971, all other countries also left the gold standard simultaneously. It didn’t have to happen that way. The Europeans, in particular, had no interest in leaving gold at that time. They could have just left the U.S. to devalue the dollar on its own, in much the way that the Brazilian cruzeiro novo was being devalued in those days, and remained with their own, independent gold standard systems.

The British pound was devalued in 1967 for similar reasons – both the U.S. and Britain had become enamored of Keynesian “easy money” notions – but the rest of the world remained with the Bretton Woods gold standard system.

The second aspect of the Bretton Woods dollar-centric system that Lehrman is concerned about is the unnatural demand for U.S. government bonds that the system created. All central banks around the world held U.S. Treasury bonds as their reserve asset. This created a demand for Treasury bonds that was in excess of their economic merits, possibly leading the U.S. government to run larger deficits and thus issue more bonds than it would have otherwise.

We can see a similar sort of thing today, where the U.S. government has been running very large budget deficits, with the resulting bond issuance in large part absorbed by foreign central banks. Some people might see this as a good thing – cheap financing – but, arguably, it could lead to chronically poor budget discipline and eventual default.

Lehrman’s proposal includes redeemability and gold coins in circulation, both of which were traditional components of the gold standard system in the U.S. as it existed before 1933.

Since he avoids use of U.S. government debt as a reserve asset for foreign governments, Lehrman proposes the use of gold bullion alone in this role. In practice, this would be fine for some small countries, but it is not too practical for the world as a whole because it would require a very large amount of gold.

A more likely outcome would be for currency issuers to use domestic bonds, either government bonds or, if you really want to be Catholic about it, high-quality corporate bonds or mortgages as a reserve asset, in addition to gold bullion. This is how gold standard systems have always operated, in the U.S., Britain and most other places, over the past two hundred years. They didn’t have a “100% bullion reserve.”

Lehrman explains this via the rather convoluted language common to academic economists today, as “settling residual balance-of-payments deficits in gold,” but this is really just another way of saying that currency issuers (presumably central banks) would not hold the debt of foreign governments.

Lehrman also adds a rather detailed program to find an appropriate new gold parity for the dollar, and also for other currencies that would join the new world gold standard around the same time. His proposals are somewhat complicated, but they amount to an earnest effort to avoid either economy-disruptive deflation (excessively high value of the dollar) or inflation (excessively low value).

In practice, the new parity arrangement would come about in something like the way that parity values were calculated between various European currencies when the euro was created at the beginning of 1999. They took the prevailing market exchange rates, plus a smoothing element, something like a multi-year moving average. (Lehrman uses the production cost of gold bullion as a smoothing element.) For some reason, this detail seems to baffle a lot of people, but, just as was the case when the Council of the European Union decided the new euro parities in 1998, if you get a bunch of people in a room they quickly work out an appropriate value that doesn’t bother anyone too much. (Lehrman recommends just this sort of international conference.)

In its basic terms I think Lehrman’s proposal is fine, and resembles the situation of around 1900 as opposed to the grossly dollar-centric Bretton Woods system that emerged after World War II. Reasonable people can disagree on some of the details, but – I would say – it is exactly that sort of conversation, the mental exercise and familiarity with basic principles that comes from discussing these topics, that we need most today.