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When I was a boy, I remember watching Richard Nixon on August 15, 1971 announce a complete “freeze” on “all wages and prices.” In today’s terms that’s what I’d call an attack on the free market.
At first, his price freeze sounded quite generous for consumers. You’d not see the price of your gas or milk creep up. Sounded like a win-win. At the time, 75% of Americans, including my mother, thought price controls were a wonderful idea. She changed her mind only a few weeks later.
During his speech that August night, Nixon severed ties between gold and the dollar. The gold standard ended. No longer would dollars need to be backed by gold.
Well, the results have been disastrous ever since then as price levels skyrocketed.
Oh, and as for his price freeze, my mother discovered her favorite brands stopped showing up in stores. Farmers stopped processing crops in the field. Manufacturers laid off workers and cut output.
Venezuela tried a similar price freeze for a decade. The results were no different than the US. For a decade, imagine shortages of food and medicine for you and your family. That’s what happened in Venezuela.
Today, here in the United States, you and I still feel the effects of Nixon’s fateful announcement. The Federal Reserve now controls the money supply in place of an objective gold standard. They print as much money as they want at any time.
The Fed’s policymaking decisions are made in periodic meetings of its “Open Market Committee.” The committee consists of 12 members – the seven members of the Fed’s Board of Governors; the president of the Federal Reserve Bank of New York; and four of the other 11 other Reserve Bank presidents.
In other words, the monetary policy of the US – the world’s largest economy – is effectively controlled by 12 people.
Before, the value of the dollar was determined in terms of gold. Anyone who had dollars could exchange for gold and vice versa. The US dollar wasn’t “legal tender” as it is today – if you didn’t want to accept dollars as payment for your goods or services, you didn’t have to. You could demand payment in gold, silver, or even accept payment in private currencies issued by many of the country’s banks.
There was competition for money. Competition makes a free market work. The Fed has abolished this competition, turning the money supply into a monopoly.
Look at this chart:
Source: Oregon State University
Before the Fed came into existence on December 13, 1913, price levels stayed steady since colonial times. Every minor price jump eventually came back down.
However, since the Fed got their paws on the money supply in 1913, we’ve seen a dramatic rise in prices.
They claim their “monetary policy objective” mission, according to the Federal Reserve Act, is to:
… promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
All good things for you and I. But, that’s not what we’ve seen.
Look at 2007, when the Fed turned into a backstop for failing companies. Rather than face the consequences any small business or average American would have to as a result of poor financial decisions, the Fed handed the banks free money.
They printed hundreds of billions of dollars – essentially your money – to act as the “last resort” to help companies and banks. Institutions that the Fed, themselves, deemed too big to fail.
As the graph above demonstrates, once a committee of 12 started calling the shots, inflation began to rise at almost an exponential rate.
For decades, discussion of a return to the gold standard has been mostly restricted to earnest discussions among libertarians. But that’s starting to change. President Donald Trump commented on the return of the gold standard last year, saying:
“We used to have a very, very solid country because it was based on a gold standard… Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”
His statement is factually correct. Bringing back the gold standard would be an incredibly difficult, but wonderful, task.
In fact, two things would need to occur to bring back the gold standard:
- First, Congress would need to abolish the Fed. There’s little political will to do that now, other than a few Tea Party Republicans willing to at least entertain the idea.
- Second, Congress would also need to redefine the dollar in terms of a unit of gold – establish a price point at which the Treasury would be obligated to exchange gold for dollars.
The biggest political obstacle to overcome, though, will be the ingrained belief that in a financial crisis, there must be a lender of last resort. To that, I would simply say, “Why?”
Critics say that in a world with a gold standard, insurance giant AIG would have collapsed. So would nearly all of Wall Street’s mega-banks, most US auto manufacturers, and many other companies. The recession would have quickly turned into a depression, with cataclysmic results for the economy.
But that’s missing the point. In a world with a gold standard, the financial excesses that brought about the events beginning in 2007 would never have occurred. If your business isn’t expecting a handout if and when times get rough, you tend to operate it more prudently.
Perhaps the best argument for a gold standard came from former Fed Chairman Ben Bernanke, who, paradoxically, opposes it. In testimony before Congress in 2011, he was asked, “Why do people buy gold?”
Bernanke’s reply: “As protection against of what we call tail risks: really, really bad outcomes.”
Indeed. I couldn’t have said it better myself.
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