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Gold: The Once and Future Money
For most of the last three millennia, the world's commercial centers have used one or another variant of a gold standard. It should be one of the best understood of human institutions, but it's not. It's one of the worst understood, by both its advocates and detractors. Though it has been spurned by governments many times, this has never been due to a fault of gold to serve its duty, but because governments had other plans for their currencies beyond maintaining their stability. And so, says Nathan Lewis, there is no reason to believe that the great monetary successes of the past four centuries, and indeed the past four millennia, could not be recreated in the next four centuries. In "Gold, " he makes a forceful, well-documented case for a worldwide return to the gold standard.Governments and central bankers around the world today unanimously agree on the desirability of stable money, ever more so after some monetary disaster has reduced yet another economy to smoking ruins. Lewis shows how gold provides the stability needed to foster greater prosperity and productivity throughout the world. He offers an insightful look at money in all its forms, from the seventh century B.C. to the present day, explaining in straightforward layman's terms the effects of inflation, deflation, and floating currencies along with their effect on prices, wages, taxes, and debt. He explains how the circulation of money is regulated by central banks and, in the process, demystifies the concepts of supply, demand, and the value of currency. And he illustrates how higher taxes diminish productivity, trade, and the stability of money. Lewis also provides an entertaining history of U.S. money and offers a sobering look at recent currency crises around the world, including the Asian monetary crisis of the late 1990s and the devastating currency devaluations in Russia, China, Mexico, and Yugoslavia.Lewis's ultimate conclusion is simple but gold has been adopted as money because it works. The gold standard produced decades and even centuries of stable money and economic abundance. If history is a guide, it will be done again.Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the "Financial Times," "Asian Wall Street" "Journal, Japan Times, Pravda, " and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
464 pages, Kindle Edition
First published January 1, 2007
11 people are currently reading
160 people want to read
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Displaying 1 - 9 of 9 reviews
June 1, 2012
Excellent book on the benefits of hard money, otherwise known as a gold standard. This book definitely gave me more insight on the benefits that I did not consider before reading it. With the direction the Fed is heading with monetary policy, a return to a gold standard may be the best option. If anything, it should be a part of the discussion.
April 8, 2021
Author Nathan Lewis drops the dismal science of economics to another level of despair by interpreting it as the “cruel science” of realpolitik. True believers in the gold standard, known as “gold bugs,” believe the U.S. could face hyperinflation because it destroyed the gold standard and made every nation vulnerable to contagious inflation. As Lewis explains, ever since President Richard Nixon left the gold standard in 1971, the dollar has been backed by the U.S. government’s “full faith and credit,” not its gold reserves. However, he also introduces theorists who do not advocate the gold standard, since nations can realize its advantages only by pegging their currencies to short-term interest rates. As shown in this thorough, readable history, national treasuries must reassure the timid that global gold and currency markets are so huge and fast that “gold vulture” speculators cannot attack major currencies, and thus force a return to the gold standard (even though the author might wish that they could). getAbstract recommends this to gold buffs, economic historians and anyone who might enjoy the debates it could provoke.
Takeaways:
Gold has been used for coinage for 2,700 years.
Gold provided the backing for most currencies during the past three centuries.
The stability of the gold standard helped the United States grow and prosper.
The 1945 Bretton Woods agreement set international currency standards based on a gold-backed U.S. dollar.
This insured the long-term stability of the international monetary system and made the U.S. the global protector of hard money.
On August 15, 1971, President Richard Nixon cut the link between the dollar and the gold standard, and currencies became “free-floating.”
Economist Arnold Laffer says three factors can stall a major country’s economy: unstable money, rising tax rates, and excessive price regulation and salaries.
Japan is recovering from deflation, but this economic trauma lingers for decades.
The U.S. and its allies should reject fiat money and return to the gold standard.
Going back to the gold standard would not be that hard for the U.S., but other countries seem better positioned to take that step, however unlikely it might be
Summary:
A Brief History of Money and the Gold Standard
Societies develop money when some special commodity becomes the basis for trading. People save that commodity (such as gold) to use as currency for future transactions. As societies evolve, they accept some sort of monetary “standard” – often associated with silver or gold – as a medium of exchange. In fact, gold has been used for coinage for 2,700 years and as decoration for 7,000 years. The advent of a medium of exchange gave rise to financial institutions. In a complex society, money is made very abstract on a large scale in the form of checks, deeds, certificates and, increasingly, in electronic form. But even though money is more abstract in modern society, JP Morgan once said, “Money is gold.” Today, “Money is information.” People want data to be “reliable and steady,” two virtues of the gold standard.
A gold standard...ties the value of money to the value of a fixed quantity of gold.
From about 1700 to nearly 2000, most countries enjoyed “stable money,” often backed by gold or silver. Stability was critical for society’s advances. Hard money held sway through wars in those three centuries, but with imperfections – particularly Britain’s vacillation after WWI. Even before the end of WWII, the U.S. became the new protector of hard money, via the Bretton Woods Conference in New Hampshire in l944. Most major nations agreed that they could deal with a common currency (the U.S. dollar) “pegged” to the gold standard.
The gold standard produced decades, even centuries, of solid money and economic abundance.
The new system held fast until August 15, l971, when President Richard Nixon cut the link between the dollar and gold, and ended Bretton Woods’ guarantee of global monetary stability. Since then, all currencies “float” against one another and cannot automatically be converted for a specific amount of gold or silver. Floating rates have created the potential for anarchic markets. This can become destructive, unless the U.S. (or another major power) takes on the role as “central banker” for the world’s monetary system. Although a return to a central commodity-based money system seems iconoclastic or laughable to most modernists who never experienced a gold standard, a review of history shows that the system worked. Leaders who imposed hard currency in the past (from Alexander the Great and Julius Caesar to Alexander Hamilton) became renowned for stabilizing economic conditions and enabling their societies to flourish.
If history is any guide, we can – and should – abandon this era of easy money and return to the stability of the gold standard.
The famous statesman-philosopher Solon of Athens issued the first true hard currency in 594 B.C. The metal’s weight coincided with the coin’s nominal value. Solon didn’t fool around. He issued an edict that the punishment for chipping, clipping or debasing the new coin would be amputation of the offender’s hands (himself included). The Mediterranean countries accepted Athens’ hard money Owl for 600 years. Then, soft and hard currencies came and went, ending usually with devaluations, as happened in Rome in A.D. 275, when Aurelian issued a silver-plated copper 20 Denarii coin to pay his soldiers. They rebelled and he was killed. Socialistic early Christianity changed things by forbidding interest and frowning on ancient Rome’s capitalism. For a thousand years of feudalism through the l4th century, people lived on large estates and got along without currency.
The strength of a gold standard is not a function of the amount of gold locked away in hoards. It is based...on the soundness of a promise between the government and the people.
Coinage and gold’s more modern history started in 1609 with the Bank of Amsterdam and its 100% silver coinage. Used widely in foreign trade, this currency helped keep interest rates down to 3-4% – close to gold standard performance. The British, who had 11% interest rates, turned to their genius philosopher John Locke. He put forth a novel solution to inflation: Produce full-weight coinage that is stable, and simultaneously protects lenders and borrowers’ property rights. (Up to then, royalty minted coins haphazardly.) Locke stabilized the English pound and required that it be minted at “3 ounces, 17 pennyweight and 10.5 grains of silver.” This standard weight lasted for 233 years, despite some lapses. As a result of the stable ratio between the pound and gold, British interest rates crashed to about the coupon rate of the 2.5% Consol Bond. Extraordinarily, that business benchmark fluctuated tightly between 3% to 6% until the l950s.
The Yankee Dollar
United States’ monetary history begins in 1776 when the colonists broke with England. The Continentals had to issue fiat money – weak “guaranteed” paper IOUs – to conduct the war. Later, the U.S. Constitution forbade formation of a central bank, like that great success in England. The early fiat money issued by the rebels became “worthless as a Continental.” However, Alexander Hamilton, the first Treasury Secretary, insisted that the nation had to honor the Continental, worth about four cents, dollar for dollar, in gold. Speculators made fortunes.
One reason governments have returned to the gold standard so many times over the course of history is that it is simply cheaper to do so.
Nongovernmental banks also financed the Civil War, mostly with printing press money. After devaluation, the dollar was pegged again to gold in l879. During most of the l800s, the U.S. maintained high-quality currency and joined Britain in spreading the gold standard. WWI finally forced the U.S. to change. In l913, faced with a liquidity crisis, President Woodrow Wilson imposed the first income tax and formed the Federal Reserve System, a sort of central bank, which was deliberately structured as 12 distinct regional institutions.
Because a gold standard lends monetary stability, interest rates can fall to very low levels and stay there indefinitely.
The U.S. dollar became the leading money globally in the 20th century because, in l913, England stopped redeeming paper pounds in specie and “temporarily” withdrew gold coins. Of course, in wartime it permitted the pound to float. Postwar, England devalued the pound to Locke’s original gold weight criteria and authorized redemption, but the nation went into recession and could not perform. By l926, nearly 40 countries (including defeated Germany) were back on the gold standard. With England’s unstable showing, the gold-backed U.S. dollar reigned supreme until the Crash of 1929. The high-riding U.S. economy crashed into the Great Depression. In 1934, under Franklin D. Roosevelt, the U.S. devalued the gold-standard dollar for the first time since 1792. It fell to $35 per ounce. Other regulations suspended bank note convertibility and outlawed most gold ownership. Such steps let the dollar continue its link to physical gold and generated the re-establishment of the global hard currency system. In 1945, Bretton Woods established the World Bank and the International Monetary Fund to maintain worldwide monetary stability through the U.S.’s linkage to gold.
The Demise of the Gold Standard
This arrangement worked until U.S. politics led to its demise. In his 1971 search to avoid losing a second term because of a recession, Nixon arm-twisted the Fed into easy money. The result was terrible – the dollar’s value sank and its convertibility came into question. The French and British ran to change their dollars for specie, but Nixon “suspended” redemptions. Suddenly all currencies were once again afloat! How important was Nixon’s decision? “The act in effect separated the entire world monetary system from its gold foundation. The end of the world gold standard was the most significant economic event of the past 50 years...”
Today’s condition of floating currencies is a very new phenomenon. It began August 15, 1971, the day Richard Nixon severed the dollar’s link with gold and destroyed the world monetary system.
Constant inflation eroded the dollar, which hit bottom at the end of Jimmy Carter’s administration. Ronald Reagan’s Fed helmsman was Alan Greenspan, who got gold oscillating $350 to $500 per ounce. Under Greenspan, the Fed held gold at about $350 throughout the l990s. The European Central Bank worked wonders and spawned the Euro in 1999. Happily, many governments now seem to want a fixed-rate system. When enough “institutional knowledge” develops, nations will find their way back to a common currency redeemable for a specific amount of a precious metal: the gold standard.
Monetary Management
Correct monetary management comes down to supply and demand, with central banks pumping out the monetary supply and watching demand to see how it is accepted. These banks have the power to control the supply. For example, they can buy bonds with “nothing” – simply the power of the printing press. The base money of central banks is usually paper currency and bank reserves. The worldwide constantly changing aggregate for such notes and deposits is the demand for money, which fluctuates. The gold standard pegs any currency to the fixed gold price. But now, instead of gold, the U.S. uses near-term rates of interest as its pivot point for adjusting the base supply of money.
It doesn’t matter if gold has been piled to the rafters in Midas’s treasury. With a stroke of the pen, as Roosevelt did in 1933 and Nixon did in 1971, the government can confiscate the gold and tear the gold standard to tatters.
Believing that a currency must be adjusted due to economic conditions is incorrect. “The ideal currency is as stable and unchanging in value as the liter or kilogram.” Yet, a “free-floating” monetary policy does respond to economic conditions, primarily inflation, “devaluation” or the accident of “rising prices.” When these events occur, nations can make a deliberate downward adjustment in their currency’s value. When a currency splits and drops, say from 100 to 50, people who hold it lose 50% of their principal’s value. Of course, the devaluating country could sell products cheaper, but its imports would cost 100% more. Citizens may soon pay more income tax, suffering comparative losses in their bond and stock holdings, and face further devaluations. Hyperinflation destroys normal values, and often produces a government collapse or a new economic and political form. The opposite, or deflation, is marked with strong price reductions, lower asset values in real terms, and economic recession or depression. Pegging a currency is complex. It must come near its market value, or produce inflation or deflation.
Floating currencies aren’t so great either because they’re produced by government manipulation rather than by the market itself.
The gold standard is often misunderstood because, fundamentally, as a “standard,” it can be totally involved or not at all involved with physical gold. The most primitive notion is that money “backed by gold” must mean that there is an equivalent amount of the metal to cover the nominal value of the currency. Not so! For example, the U.S. has a monetary base of $800 billion; however, at $350 per ounce, the worldwide supply of gold has an estimated worth of $1,400 billion. Thus, more than half of the world’s gold would have to be owned by the U.S. and reside in its vaults to act as America’s guarantee. Physical gold is not the guarantee. Ultimately, the real guarantee behind the gold standard is the ability and willingness of a government to defend “the integrity of the monetary system.” If this promise is broken, chaotic conditions usually follow.
The gold standard advocates had blown it and, since then, they have not had another chance to make their case.
Money theorist Arthur Laffer says that the three main reasons that major countries experience economic declines are: 1) unstable monetary conditions; 2) high or rising tax rates; and 3) excessive or crushing regulation of prices, and salaries or other types of wages. Clearly the gold standard has a long record of supporting growth. When it is in effect, governments can concentrate on imposing the fairest policies on all types of taxation, including tariffs.
Throughout history, many types of currency...were rejected in favor of gold: cowrie shells, cows, wheat, giant stone disks, strings of beads, cauldrons and iron tripods, metal rings, copper, bronze, silver, and even cocoa beans and whale’s teeth.
Japan’s economic history provides a clear comparison of the gold standard versus soft currency. In l951, Japan signed the San Francisco peace treaty and largely took over its own fate. Its government fostered growth by instituting minimum wages and tax incentives. With its liberal tax policies, Japan’s economy grew. But in the wake of floating currencies, its economy overheated in the early 1980s. The yen rose to unsustainable levels, provoking dramatic deflation after land values and stock prices soared, and then crashed. A generation later, Japan is recovering nicely, but the scars linger. Its stock index is still 50% below its l985 peak. Other devaluations – Mexico, China, Yugoslavia, Russia – have been equally destructive.
Gold still represents the ultimate form of payment in the world.
Can Gold Come Back? Bringing back the gold standard has advocates, even in the highest places. Greenspan, who managed the greatest floating currency for years, favored the gold standard. Reagan, a supporter of hard currency, said in 1980, “No nation in history has ever survived fiat money, money that did not have precious metal backing.” Ending soft money would benefit everyone, especially billions of poor people in undeveloped nations who bear the brunt of today’s monetary instability.
Ironically, this shift, if it ever comes, might stem not from the U.S. or the EU. Instead, it might be led by Japan. Though small, Japan has advanced technology, strong industries, a large population and the world’s second largest economy. Russia, China or both together, also might lead the way. When hard money returns, it will not undo the great nations’ leadership position. They provide too many global benefits. However, history shows that the gold standard works best with a direct link to physical gold. Reinstituting it would again prove that, “Good money leads to good governance.”
Takeaways:
Gold has been used for coinage for 2,700 years.
Gold provided the backing for most currencies during the past three centuries.
The stability of the gold standard helped the United States grow and prosper.
The 1945 Bretton Woods agreement set international currency standards based on a gold-backed U.S. dollar.
This insured the long-term stability of the international monetary system and made the U.S. the global protector of hard money.
On August 15, 1971, President Richard Nixon cut the link between the dollar and the gold standard, and currencies became “free-floating.”
Economist Arnold Laffer says three factors can stall a major country’s economy: unstable money, rising tax rates, and excessive price regulation and salaries.
Japan is recovering from deflation, but this economic trauma lingers for decades.
The U.S. and its allies should reject fiat money and return to the gold standard.
Going back to the gold standard would not be that hard for the U.S., but other countries seem better positioned to take that step, however unlikely it might be
Summary:
A Brief History of Money and the Gold Standard
Societies develop money when some special commodity becomes the basis for trading. People save that commodity (such as gold) to use as currency for future transactions. As societies evolve, they accept some sort of monetary “standard” – often associated with silver or gold – as a medium of exchange. In fact, gold has been used for coinage for 2,700 years and as decoration for 7,000 years. The advent of a medium of exchange gave rise to financial institutions. In a complex society, money is made very abstract on a large scale in the form of checks, deeds, certificates and, increasingly, in electronic form. But even though money is more abstract in modern society, JP Morgan once said, “Money is gold.” Today, “Money is information.” People want data to be “reliable and steady,” two virtues of the gold standard.
A gold standard...ties the value of money to the value of a fixed quantity of gold.
From about 1700 to nearly 2000, most countries enjoyed “stable money,” often backed by gold or silver. Stability was critical for society’s advances. Hard money held sway through wars in those three centuries, but with imperfections – particularly Britain’s vacillation after WWI. Even before the end of WWII, the U.S. became the new protector of hard money, via the Bretton Woods Conference in New Hampshire in l944. Most major nations agreed that they could deal with a common currency (the U.S. dollar) “pegged” to the gold standard.
The gold standard produced decades, even centuries, of solid money and economic abundance.
The new system held fast until August 15, l971, when President Richard Nixon cut the link between the dollar and gold, and ended Bretton Woods’ guarantee of global monetary stability. Since then, all currencies “float” against one another and cannot automatically be converted for a specific amount of gold or silver. Floating rates have created the potential for anarchic markets. This can become destructive, unless the U.S. (or another major power) takes on the role as “central banker” for the world’s monetary system. Although a return to a central commodity-based money system seems iconoclastic or laughable to most modernists who never experienced a gold standard, a review of history shows that the system worked. Leaders who imposed hard currency in the past (from Alexander the Great and Julius Caesar to Alexander Hamilton) became renowned for stabilizing economic conditions and enabling their societies to flourish.
If history is any guide, we can – and should – abandon this era of easy money and return to the stability of the gold standard.
The famous statesman-philosopher Solon of Athens issued the first true hard currency in 594 B.C. The metal’s weight coincided with the coin’s nominal value. Solon didn’t fool around. He issued an edict that the punishment for chipping, clipping or debasing the new coin would be amputation of the offender’s hands (himself included). The Mediterranean countries accepted Athens’ hard money Owl for 600 years. Then, soft and hard currencies came and went, ending usually with devaluations, as happened in Rome in A.D. 275, when Aurelian issued a silver-plated copper 20 Denarii coin to pay his soldiers. They rebelled and he was killed. Socialistic early Christianity changed things by forbidding interest and frowning on ancient Rome’s capitalism. For a thousand years of feudalism through the l4th century, people lived on large estates and got along without currency.
The strength of a gold standard is not a function of the amount of gold locked away in hoards. It is based...on the soundness of a promise between the government and the people.
Coinage and gold’s more modern history started in 1609 with the Bank of Amsterdam and its 100% silver coinage. Used widely in foreign trade, this currency helped keep interest rates down to 3-4% – close to gold standard performance. The British, who had 11% interest rates, turned to their genius philosopher John Locke. He put forth a novel solution to inflation: Produce full-weight coinage that is stable, and simultaneously protects lenders and borrowers’ property rights. (Up to then, royalty minted coins haphazardly.) Locke stabilized the English pound and required that it be minted at “3 ounces, 17 pennyweight and 10.5 grains of silver.” This standard weight lasted for 233 years, despite some lapses. As a result of the stable ratio between the pound and gold, British interest rates crashed to about the coupon rate of the 2.5% Consol Bond. Extraordinarily, that business benchmark fluctuated tightly between 3% to 6% until the l950s.
The Yankee Dollar
United States’ monetary history begins in 1776 when the colonists broke with England. The Continentals had to issue fiat money – weak “guaranteed” paper IOUs – to conduct the war. Later, the U.S. Constitution forbade formation of a central bank, like that great success in England. The early fiat money issued by the rebels became “worthless as a Continental.” However, Alexander Hamilton, the first Treasury Secretary, insisted that the nation had to honor the Continental, worth about four cents, dollar for dollar, in gold. Speculators made fortunes.
One reason governments have returned to the gold standard so many times over the course of history is that it is simply cheaper to do so.
Nongovernmental banks also financed the Civil War, mostly with printing press money. After devaluation, the dollar was pegged again to gold in l879. During most of the l800s, the U.S. maintained high-quality currency and joined Britain in spreading the gold standard. WWI finally forced the U.S. to change. In l913, faced with a liquidity crisis, President Woodrow Wilson imposed the first income tax and formed the Federal Reserve System, a sort of central bank, which was deliberately structured as 12 distinct regional institutions.
Because a gold standard lends monetary stability, interest rates can fall to very low levels and stay there indefinitely.
The U.S. dollar became the leading money globally in the 20th century because, in l913, England stopped redeeming paper pounds in specie and “temporarily” withdrew gold coins. Of course, in wartime it permitted the pound to float. Postwar, England devalued the pound to Locke’s original gold weight criteria and authorized redemption, but the nation went into recession and could not perform. By l926, nearly 40 countries (including defeated Germany) were back on the gold standard. With England’s unstable showing, the gold-backed U.S. dollar reigned supreme until the Crash of 1929. The high-riding U.S. economy crashed into the Great Depression. In 1934, under Franklin D. Roosevelt, the U.S. devalued the gold-standard dollar for the first time since 1792. It fell to $35 per ounce. Other regulations suspended bank note convertibility and outlawed most gold ownership. Such steps let the dollar continue its link to physical gold and generated the re-establishment of the global hard currency system. In 1945, Bretton Woods established the World Bank and the International Monetary Fund to maintain worldwide monetary stability through the U.S.’s linkage to gold.
The Demise of the Gold Standard
This arrangement worked until U.S. politics led to its demise. In his 1971 search to avoid losing a second term because of a recession, Nixon arm-twisted the Fed into easy money. The result was terrible – the dollar’s value sank and its convertibility came into question. The French and British ran to change their dollars for specie, but Nixon “suspended” redemptions. Suddenly all currencies were once again afloat! How important was Nixon’s decision? “The act in effect separated the entire world monetary system from its gold foundation. The end of the world gold standard was the most significant economic event of the past 50 years...”
Today’s condition of floating currencies is a very new phenomenon. It began August 15, 1971, the day Richard Nixon severed the dollar’s link with gold and destroyed the world monetary system.
Constant inflation eroded the dollar, which hit bottom at the end of Jimmy Carter’s administration. Ronald Reagan’s Fed helmsman was Alan Greenspan, who got gold oscillating $350 to $500 per ounce. Under Greenspan, the Fed held gold at about $350 throughout the l990s. The European Central Bank worked wonders and spawned the Euro in 1999. Happily, many governments now seem to want a fixed-rate system. When enough “institutional knowledge” develops, nations will find their way back to a common currency redeemable for a specific amount of a precious metal: the gold standard.
Monetary Management
Correct monetary management comes down to supply and demand, with central banks pumping out the monetary supply and watching demand to see how it is accepted. These banks have the power to control the supply. For example, they can buy bonds with “nothing” – simply the power of the printing press. The base money of central banks is usually paper currency and bank reserves. The worldwide constantly changing aggregate for such notes and deposits is the demand for money, which fluctuates. The gold standard pegs any currency to the fixed gold price. But now, instead of gold, the U.S. uses near-term rates of interest as its pivot point for adjusting the base supply of money.
It doesn’t matter if gold has been piled to the rafters in Midas’s treasury. With a stroke of the pen, as Roosevelt did in 1933 and Nixon did in 1971, the government can confiscate the gold and tear the gold standard to tatters.
Believing that a currency must be adjusted due to economic conditions is incorrect. “The ideal currency is as stable and unchanging in value as the liter or kilogram.” Yet, a “free-floating” monetary policy does respond to economic conditions, primarily inflation, “devaluation” or the accident of “rising prices.” When these events occur, nations can make a deliberate downward adjustment in their currency’s value. When a currency splits and drops, say from 100 to 50, people who hold it lose 50% of their principal’s value. Of course, the devaluating country could sell products cheaper, but its imports would cost 100% more. Citizens may soon pay more income tax, suffering comparative losses in their bond and stock holdings, and face further devaluations. Hyperinflation destroys normal values, and often produces a government collapse or a new economic and political form. The opposite, or deflation, is marked with strong price reductions, lower asset values in real terms, and economic recession or depression. Pegging a currency is complex. It must come near its market value, or produce inflation or deflation.
Floating currencies aren’t so great either because they’re produced by government manipulation rather than by the market itself.
The gold standard is often misunderstood because, fundamentally, as a “standard,” it can be totally involved or not at all involved with physical gold. The most primitive notion is that money “backed by gold” must mean that there is an equivalent amount of the metal to cover the nominal value of the currency. Not so! For example, the U.S. has a monetary base of $800 billion; however, at $350 per ounce, the worldwide supply of gold has an estimated worth of $1,400 billion. Thus, more than half of the world’s gold would have to be owned by the U.S. and reside in its vaults to act as America’s guarantee. Physical gold is not the guarantee. Ultimately, the real guarantee behind the gold standard is the ability and willingness of a government to defend “the integrity of the monetary system.” If this promise is broken, chaotic conditions usually follow.
The gold standard advocates had blown it and, since then, they have not had another chance to make their case.
Money theorist Arthur Laffer says that the three main reasons that major countries experience economic declines are: 1) unstable monetary conditions; 2) high or rising tax rates; and 3) excessive or crushing regulation of prices, and salaries or other types of wages. Clearly the gold standard has a long record of supporting growth. When it is in effect, governments can concentrate on imposing the fairest policies on all types of taxation, including tariffs.
Throughout history, many types of currency...were rejected in favor of gold: cowrie shells, cows, wheat, giant stone disks, strings of beads, cauldrons and iron tripods, metal rings, copper, bronze, silver, and even cocoa beans and whale’s teeth.
Japan’s economic history provides a clear comparison of the gold standard versus soft currency. In l951, Japan signed the San Francisco peace treaty and largely took over its own fate. Its government fostered growth by instituting minimum wages and tax incentives. With its liberal tax policies, Japan’s economy grew. But in the wake of floating currencies, its economy overheated in the early 1980s. The yen rose to unsustainable levels, provoking dramatic deflation after land values and stock prices soared, and then crashed. A generation later, Japan is recovering nicely, but the scars linger. Its stock index is still 50% below its l985 peak. Other devaluations – Mexico, China, Yugoslavia, Russia – have been equally destructive.
Gold still represents the ultimate form of payment in the world.
Can Gold Come Back? Bringing back the gold standard has advocates, even in the highest places. Greenspan, who managed the greatest floating currency for years, favored the gold standard. Reagan, a supporter of hard currency, said in 1980, “No nation in history has ever survived fiat money, money that did not have precious metal backing.” Ending soft money would benefit everyone, especially billions of poor people in undeveloped nations who bear the brunt of today’s monetary instability.
Ironically, this shift, if it ever comes, might stem not from the U.S. or the EU. Instead, it might be led by Japan. Though small, Japan has advanced technology, strong industries, a large population and the world’s second largest economy. Russia, China or both together, also might lead the way. When hard money returns, it will not undo the great nations’ leadership position. They provide too many global benefits. However, history shows that the gold standard works best with a direct link to physical gold. Reinstituting it would again prove that, “Good money leads to good governance.”
This entire review has been hidden because of spoilers.
April 20, 2009
This book is well written and more reasonable than many of its gold-standard kin. Is it perfectly practical? Well no, of course not; but then few gold-standard-advocacy tomes of the last 30 years have been. What makes this book different is that its author freely concedes the impracticality of many gold-standard recommendations.
In some ways, the book is a round-the-world tour of every place that high taxes and unstable currency have failed mankind. It is no exaggeration to write that Nathan Lewis believes every single catastrophe in human history was caused by a combination of unstable currency and high taxes. Some of this is trite – given post-9/18/08 events. And, yes, there’s plenty of cherry-picking going on too.
But Lewis deserves credit for so thoroughly taking the IMF to task. He does a marvelous job of showing how much harm the IMF has done to emerging markets round the world: Loan -> Inflate -> Default -> Privatize -> Conduct fire sale of natural resources to U.S. banks.
The primary argument about a return to the gold standard has been that it would lay ruin to all the “value” and “progress” of the last 30 years. Since the market has already done that, now mightn’t be a bad time to rekindle the debate about metal convertibility. We’ll see.
Plans to return to the gold standard without the U.S.’s complicity, though, are farcical; we’ll just “beggar our neighbors” to death by inflating the dollar to a place that makes other nations’ exports impossible. That’s life in the post-Bretton Woods world, my friends; what other country in history gets to repay its loans from other countries in its own currency?
In some ways, the book is a round-the-world tour of every place that high taxes and unstable currency have failed mankind. It is no exaggeration to write that Nathan Lewis believes every single catastrophe in human history was caused by a combination of unstable currency and high taxes. Some of this is trite – given post-9/18/08 events. And, yes, there’s plenty of cherry-picking going on too.
But Lewis deserves credit for so thoroughly taking the IMF to task. He does a marvelous job of showing how much harm the IMF has done to emerging markets round the world: Loan -> Inflate -> Default -> Privatize -> Conduct fire sale of natural resources to U.S. banks.
The primary argument about a return to the gold standard has been that it would lay ruin to all the “value” and “progress” of the last 30 years. Since the market has already done that, now mightn’t be a bad time to rekindle the debate about metal convertibility. We’ll see.
Plans to return to the gold standard without the U.S.’s complicity, though, are farcical; we’ll just “beggar our neighbors” to death by inflating the dollar to a place that makes other nations’ exports impossible. That’s life in the post-Bretton Woods world, my friends; what other country in history gets to repay its loans from other countries in its own currency?
November 6, 2024
Imprescindible.
Comienza con una introducción al mundo de las finanzas sólidas y las divisas Fiat, explicando de manera sencilla porque no hay debate alguno respecto a que es mejor. Prosigue con un repaso histórico de fracasos financieros consecuencia de altos impuestos y moneda poco sólida, a lo largo y ancho del planeta, para finalmente concluir con lo evidente:
Patrón oro y impuestos bajos son la única vía a la prosperidad de las naciones.
Comienza con una introducción al mundo de las finanzas sólidas y las divisas Fiat, explicando de manera sencilla porque no hay debate alguno respecto a que es mejor. Prosigue con un repaso histórico de fracasos financieros consecuencia de altos impuestos y moneda poco sólida, a lo largo y ancho del planeta, para finalmente concluir con lo evidente:
Patrón oro y impuestos bajos son la única vía a la prosperidad de las naciones.
December 28, 2025
Not a pleasure read, but probably should be required if you are in contention for the Fed board of governors.
May 18, 2008
This book has pretty much convinced me that one of the deep problems in our society (there are many others of course) is unstable currency, and that having some sort of physical commodity backing the currency is necessary to make it stable over the long run.
Lewis isn't arguing that we should buy our groceries with gold coins, but rather that "fiat money" - money whose value rests solely in the faith one has in the issuer - is inherently prone to inflation. This is partly because the issuer can always print more cash. In good times, the currency may be stable, but when under pressure (say, to pay for a war) the temptation to print more money to pay the issuer's debts is too great to resist; therefore some physical commodity which can't be created at will is necessary to prevent runaway money creation.
Lewis proposes a reform of the monetary supply that, while it won't necessarily meet the wishes of a free banking enthusiast, does seem to have the potential to stabilize currency value fluctuations without significant changes to the existing financial system: when the Federal Reserve adds or subtracts money from the economy it should do so not with the goal of maintaining a certain target interest rate (as is current practice), but rather to maintain a target value of the currency as determined by the market price of a commodity (gold). In other words, the Fed would pick a price of gold (in $/oz) and add or subtract dollars in the economy to keep the gold price stable so that the gold price acts as a reference point.
I honestly don't know if this would work, but Lewis' arguments seem well constructed and researched. He provides a long history of the development of money, gold's role in it, and the relatively recent changes (since the 1970s) to money that seem to explain many of the economic fluctuations we are currently experiencing. Along the way there is interesting discussion of the philosophical role and nature of money (think of money as a denominator of trust, in society and between strangers), and of the structure of the current finance system.
An interesting read for anyone interested in our current economic state, how we got here, and whether we might make things better.
Lewis isn't arguing that we should buy our groceries with gold coins, but rather that "fiat money" - money whose value rests solely in the faith one has in the issuer - is inherently prone to inflation. This is partly because the issuer can always print more cash. In good times, the currency may be stable, but when under pressure (say, to pay for a war) the temptation to print more money to pay the issuer's debts is too great to resist; therefore some physical commodity which can't be created at will is necessary to prevent runaway money creation.
Lewis proposes a reform of the monetary supply that, while it won't necessarily meet the wishes of a free banking enthusiast, does seem to have the potential to stabilize currency value fluctuations without significant changes to the existing financial system: when the Federal Reserve adds or subtracts money from the economy it should do so not with the goal of maintaining a certain target interest rate (as is current practice), but rather to maintain a target value of the currency as determined by the market price of a commodity (gold). In other words, the Fed would pick a price of gold (in $/oz) and add or subtract dollars in the economy to keep the gold price stable so that the gold price acts as a reference point.
I honestly don't know if this would work, but Lewis' arguments seem well constructed and researched. He provides a long history of the development of money, gold's role in it, and the relatively recent changes (since the 1970s) to money that seem to explain many of the economic fluctuations we are currently experiencing. Along the way there is interesting discussion of the philosophical role and nature of money (think of money as a denominator of trust, in society and between strangers), and of the structure of the current finance system.
An interesting read for anyone interested in our current economic state, how we got here, and whether we might make things better.
May 5, 2012
A fascinating account of monetary and fiscal management (and mismanagement) over the course of human history. Lewis' policy bias is crystal clear -- he advocates stable currency and low taxes relentlessly, and proceeds to reinterpret various economic booms and currency crises in light of that policy prescription. This makes for interesting reading, but several parts of his argument were glossed over. I finished the book feeling that something was missing, but couldn't put my finger on what exactly.
September 27, 2012
Excellent Book. Buy gold.
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July 30, 2012Wonderful book, in my opinion. He explains that it's not so much that people are against government debt. What they are against is government waste.
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