Saturday, June 9, 2012

James Grant on the Gold Standard

Fierce defender of free markets, commentator James Grant opposes most government intervention in the marketplace. But he goes further than most free marketers: he opposes government intervention in the money markets.

That is, he wants to return to the gold standard. You cannot, he opines, have a free market in goods and services when the government can manipulate the value of the currency.

Grant begins his meditation by surveying the political scene and comparing our current big government president with his opponent, who favors big government lite.

In his words:

Bailouts, bear markets and joblessness will surely put capitalism on the November ballot. How do you like your enterprise, Mr. and Ms. American Voter—free or stifled or a little something in between?

The 2012 election promises a clear ideological divide. Mitt Romney may be no Ron Paul, but neither is there any mistaking him for Barack Obama. The former private-equity titan will likely take his stand with a kind of almost-free-enterprise—the welfare state as we knew it before ObamaCare, so-called quantitative easing and the enterprise-thwarting dread that someone in Washington is dreaming up even costlier experiments than the ones that have already failed.

Why is the American economy so moribund? The Obama administration’s will to regulate is playing its part. Beyond that, Grant reminds us that the Federal Reserve’s efforts to juice the money supply have also done their own special kind of damage.

In his words:

Today the American economy sleepwalks. Ultralow interest rates starve the savers and finance the speculators. Unanchored exchange rates fire up talk of "currency wars."

Both Ben Bernanke and Barack Obama have been trying to manage the economic crisis by applying the lessons from the Great Depression. Bernanke is doing what he thinks that the Federal Reserve should have done way back then while Obama is doing what he thinks worked for FDR.

Grant suggests that they are ignoring a more pertinent example, another massive economic contraction, one that occurred in 1920-21 but that was short, ugly and contained… thanks to policies put in place by the Harding administration.

Grant explains:

For all the talking that Fed Chairman Ben Bernanke does about the Great Depression of the 1930s, he has nothing to say about the not-great depression of the 1920s. It was ugly and sharp, but it ended 18 months after it began. And in the course of it ending, the Treasury reduced the public debt to $22.9 billion from $24.3 billion. According to 21st-century doctrine, producers and consumers are incapable of climbing out of a deflationary hole without a government-provided fiscal and monetary ladder. Nonetheless, in this particular unsung depression, individuals managed the trick, which suggests that markets work if only we let them.

Of course, the Harding administration is not held in very high repute. Thus, we are unwilling to follow its example, even when it seems to have gotten something right. Besides, we believe we have found a better way.

Grant disagrees:

Fixing an interest rate, manipulating the structure of interest rates and goosing the stock market in the name of "stimulating" the economy are prime examples. Many argue that these radical interventions have spared us from another Great Depression. More likely, I think, the same machinations have snuffed out whatever chance we had of dealing with our difficulties as efficiently as our forebears did in the not-great depression of the early 1920s.

The answer, Grant says, is a return to the gold standard:

Currency convertible into gold of the legal specifications is a vital protection against economic manipulation by the government. As long as currencies are convertible, governments cannot easily tamper with the price of goods, and therefore the wage standards of the country. They cannot easily confiscate the savings of the people by manipulation of inflation and deflation. . . . Once free of convertible standards, the executives of every "managed-currency" country had gone on a spree of government spending, and the people thereby lost control of the public purse—their first defense against tyranny.

Agree with him or disagree with him James Grant is always worth some serious thought.

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