Money_How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About It

by Steve Forbes

  As U.S. News and World Report reported, the loans for many young people have been “a gateway drug to destructive financial behavior.” The magazine describes how one student used his loans to fund an expensive lifestyle that allowed him to purchase “a Jeep, stereo equipment, televisions and more. What he didn’t spend, he invested, and lost.” After graduation he faced unemployment and loan payments that were double his rent.

  No surprise that, with tuition debt reaching $1 trillion, one of the complaints of the younger Occupy Wall Street protestors was the student loan crisis. They have a point. Loose money corrupts more than market truth telling. What kind of society sells a lifelong burden of indebtedness to people inexperienced with money who are at the beginning of their working lives? Loan sharks and drug dealers who create debt and dependence get put in prison. But the federal government gets to call its enabling of debt “financial aid.”

  Mortgages and student loans are the most extreme examples of the increase in consumer debt that has taken place in the era of fiat money. Since 1971, the last year the dollar was linked to gold, the ratio of total consumer debt to GDP has trended upward, from 12% to around 17.5% in 2013.

  The personal savings rate, meanwhile, has trended downward, from 13% to under 5% today. When people are unable to save, they have greater difficulty planning for retirement or handling emergencies. They can’t build wealth and move ahead. Little wonder so many people today are so angry.

  The Crime Connection

  The stealth thievery of monetary debasement trickles down too. The late journalist Henry Hazlitt is among many who have observed the relationship between crime and loose money. In his words, “Reward comes to depend less and less on effort and production.” Therefore, “corruption or crime [seems] a surer path to quick reward.”

  The murder rate in inflation-racked Venezuela is 79 per 100,000, more than twice that of neighboring Colombia, a nation with a long history of violence. An estimated 1 million people have left Venezuela in a little more than a decade.

  Under the Kirchner government, Argentina has also seen an increase in violent crime. Capital controls have forced Argentines to store their cash at home, resulting in a rash of home invasion robberies.

  With monetary expansion beginning to drive up prices in the United States, crime has begun to increase. In 2012 the National Crime Victimization Survey by the Bureau of Justice Statistics reported the first rise in violent and property crime in two decades.

  Researchers say that this is typical. A study in the journal Economics Letters found that since 1960 there has been a consistent correlation between the U.S. crime rate and the Misery Index, an indicator measuring inflation and unemployment.

  Inflation has actually been found to have a stronger connection to crime than joblessness. One study by German and American researchers found that inflation had far and away the greatest effect on property crime, greater than variables like manufacturing employment. The authors write: “the answer leaves no room for interpretation. Almost all of the impact of the three macroeconomic variables falls on the inflation rate.”

  Richard Rosenfeld, a sociologist at the University of Missouri–St. Louis, wondered why the catastrophic 2008 economic recession, with its soaring jobless rates, did not produce an increase in crime. Crime in fact decreased. Rosenfeld now believes that the reason was that when the economy took a dive, the United States experienced the first serious deflation in 50 years. In 2010 prices began to rise—and crime did too.

  From 2010 to 2011, the inflation rate doubled from 1.6% to 3.2%, according to the Consumer Price Index. Shortly thereafter, the Bureau of Justice Statistics announced a sudden increase in crime categories across the board. This supports the observations of Rosenfeld and other researchers who have found a lag to exist between inflation and the onset of crime—an increase in inflation tends to be quickly followed by an increase in crime rates.

  America in the Twenty-First Century: A Declaration of Dependence?

  Fiat money undermines social morality by facilitating the reckless expansion of government. It allows ambitious politicians to get votes by creating new and larger bureaucracies that create dependence and corrupt markets. Four decades of fiat money have facilitated enormous government borrowing that has produced today’s dangerous level of government debt—and America’s welfare bureaucracies and entitlement culture.

  When Richard Nixon severed the link to gold in 1971, the total U.S. federal debt stood at $398 billion, 34% of GDP. Today, it tops $17 trillion, over 100% of GDP—large enough to cause the nations of the world that are holding U.S. bonds to worry about America’s future solvency, and large enough for the rating agency Standard & Poor’s to downgrade the nation’s credit rating in 2011.

  Federal payments to individuals for programs such as food stamps have exploded. Before the 1970s, it was around 21% of federal spending. Today it’s around 70%. Almost half the U.S. population no longer pays income taxes.

  The Supplemental Nutrition Assistance Program (SNAP), formerly the food stamp program, has more than doubled between 2008 and 2012, from $37.6 billion to $78.4 billion in fiscal year 2012. Housing assistance is near an all-time high of $55 billion. Medicaid, which had been rapidly increasing before the administration’s healthcare law, is set to explode. David B. Muhlhausen and Patrick D. Tyrrell of the Heritage Foundation write:

  Americans have reached a point in the life of their republic at which the democratic political process has become a means for many voters to defend and expand the “benefits” they receive from government. Do Americans want a republic that encourages and validates a growing dependence on the state and a withering of civil society?

  With more people than ever dependent on government and an economy growing at the lowest rate for a recovery ever, many today wonder whether America may be entering an era of economic decline resembling that of Spain in the Middle Ages, whose overly loose money from its mineral wealth encouraged idleness and corruption and discouraged enterprise.

  The Spanish had problems with big government too. British historian J. H. Elliott wrote of arbitristas, Spanish reformers who saw “at the heart of their country a vast court, a monstrous tumour swelling larger and larger, and relentlessly consuming the life of the nation. The court and the swollen bureaucracy were crying out for reform.”

  In the recent battles over the federal budget that led to the partial government shutdown in 2013, media coverage of the debate focused narrowly on debt and deficits. The fight, however, really was over larger questions: Should America be allowed to continue down the road to more spending and dependency? Do we want to suffer the consequences of again raising the ceiling, increased borrowing, and pressures for still more monetary expansion that would further erode the value of the dollar?

  The Lesson of Rome

  Lawrence Reed, president of the Foundation for Economic Education, believes that there are lessons to be learned from ancient Rome, whose destruction of money caused a gradual erosion of the social and political order that led to the fall of the empire. Rome’s monetary and societal debasement began “when the people discovered another source of income: the political process—the State.” In a powerful speech to the 2013 Freedom Fest, he told attendees:

  Roman coinage was debased by one emperor after another to pay for expensive programs. Once almost pure silver, the denarius by the year 300 was little more than a piece of junk containing less than five percent silver.

  The Roman Empire became a welfare empire. The result was a raging inflation. Like today, savings vanished. Businessmen were vilified. Increasingly overbearing government strangled the private economy. And finally:

  By 476 A.D., when barbarians wiped the empire from the map, Rome had committed moral and economic suicide. Romans first lost their character. Then, as a consequence, they lost their liberties and ultimately their civilization.

  Will that be us?

  THE NUGGET

  When people stop trusting money, they stop trusting each o
ther

  CHAPTER 6

  The Gold Standard

  How to Rescue the Twenty-First Century Global Economy

  Time will run back and fetch the Age of Gold.

  —JOHN MILTON

  You cannot have a gold standard system in the future if nobody knows how to do it.

  —NATHAN LEWIS, Gold: The Monetary Polaris

  FREEING THE DOLLAR FROM GOLD WAS SUPPOSED TO MAKE the United States stronger. Instead it has made the country weaker. It has eroded America’s wealth and has jeopardized its leadership position as the world’s strongest economy.

  Something has to be done.

  There is a growing consensus that the U.S. monetary system is broken. A 2013 Rasmussen poll found that an astounding 74% of American adults are in favor of auditing the Federal Reserve and making the results public. Only 10% oppose it. A substantial number believe the Fed chairman has too much power over the economy. Momentum is building on Capitol Hill for a reevaluation of the role of the Federal Reserve System.

  People are seeking solutions. We mentioned earlier the movement for alternative currencies. Lately there has been a push for another option that, until very recently, few people in policy circles would seriously entertain: a return to stable money through the use of a gold standard.

  Gold.

  Calls for a new gold standard are gaining support. The people are leading the way. Gold and silver coins are now accepted legal tender in the state of Utah. The states of Georgia and Montana have outlined ideas to allow the use of gold as payment in certain sectors of the economy.

  Rep. Kevin Brady, chairman of the Congressional Joint Economic Committee, and Sen. John Cornyn are pushing a bill to create a bipartisan commission to conduct a thorough examination of monetary policy. Brady’s bill is attracting sponsors in both the House and the Senate. Already, Rep. Ted Poe, another Texas Republican, has submitted a bill with a proposal for a new gold standard.

  When the Cato Institute, a libertarian think tank, held an event discussing gold in the summer of 2013, the meeting drew hundreds of journalists, academics, entrepreneurs, key congressional staffers, and other policy thought leaders. Many had never before been interested in the subject of a gold standard. Ralph Benko, who edits the Lehrman Institute’s The Gold Standard Now and is a Forbes.com columnist, marveled at the attendance, declaring, “This was no ordinary event. It may, in retrospect, be seen as the gold standard’s Woodstock.”

  A return to gold-based money is not yet front and center on the national agenda. The policy establishment still dismisses it as radical. But history has shown time and again that great social changes begin as seemingly radical ideas.

  Why Gold?

  We need gold because, as we’ve emphasized throughout this book, gold is the best and the only way to achieve truly stable money. Relinking the dollar to gold would eliminate the economic volatility and monetary crises that have been the consequence of fiat money. It would stop the erosion of our wealth that is taking place today as a result of Fed-engineered inflation. With a gold standard, there would be no inflation. That’s right. We said it and we mean it. As critics so often misunderstand, no inflation does not necessarily mean an end to price instability. Prices, as we’ve explained elsewhere, will continue to rise and fall in response to changes in supply, demand, and productivity. As well they should. Gold would allow prices to convey real market values, not Fed-distorted ones.

  In other words, gold would enable money, for the first time in decades, to completely fulfill its role as a facilitator of transactions, unimpeded and undistorted. People conducting business in the marketplace would have a tool that really works. Commerce would boom.

  That happened in the late nineteenth century, when most nations, inspired by Great Britain’s spectacular economic success after tying the pound to gold, spontaneously adopted a gold standard. The global economy experienced an explosion in trade, capital creation, and investment that remained unmatched for the next 100 years. Gold worked then because leaders and governments didn’t violate the rules, as their successors did in the twentieth and twenty-first centuries. They believed in the principles of sound money. A gold standard would deliver a stimulus to the United States and the world economy that Fed bureaucrats could only dream of.

  Gold Takes the Politics out of Money

  Gold takes decisions about the value and supply of money out of the hands of bureaucrats whose judgment is too often in error or driven by politics. Bureaucrats can no more guess the need for money than central planners could run an economy in the days of the Soviet Union. Seemingly sophisticated equations and various measures of money can never anticipate what people actually do.

  The job of a government’s central bank would simply be to maintain a stable gold price. In a gold standard system, the price of gold acts as a barometer. It indicates whether there is too much liquidity in the economy and whether we’re heading toward inflation or if there’s too little liquidity and possible deflation.

  The demand for money reflects the ever-shifting actions and desires of billions of people in global markets, many of whom are reacting to thoroughly unanticipated events. Gold prices convey these changing needs better than anything else.

  Why isn’t the United States on a gold standard today? There are a number of reasons. The traumas of World War I and the Great Depression spurred the rise of neo-mercantilism and a new infatuation with activist government. If government could win wars by mobilizing the economy, many believed, imagine how society would benefit from its vast powers in peacetime, including greater control over money.

  Then there are the hostile myths about gold that, like barnacles, remain stubbornly attached even today. Allegations range from “there’s not enough gold in the world” to “the price of gold is too volatile” to even that “a gold standard constitutes the price fixing of money.”

  You’ll also hear accusations that the gold standard caused the Great Depression and later created pressures leading to the end of the Bretton Woods system. That’s like blaming a skyscraper’s implosion on the tools used to build it, not on the violations of building codes that caused the collapse.

  Debunking the Myths About Gold

  Money simply reflects conditions in an economy. Like those construction tools, gold has repeatedly been blamed for economic destruction caused by obstacles that governments place in the way of commerce. First and foremost was the U.S. enactment of the Smoot-Hawley Tariff, which we will discuss later in this chapter. Placing onerous taxes on thousands of products, that toxic act of protectionism started the global trade war that triggered the Great Depression. Countries then deepened the slump with ghastly increases in taxes. A wave of devaluations followed. Nations, desperate to revive their economies, cast aside the wisdom of sound money.

  Gold opponents also believe a peg to the precious metal opens up the United States and other nations to runs on gold supplies. This isn’t true either. The focus on gold’s supply (or the lack of it) is the same mistake made by mercantilist monarchs who thought gold in and of itself constituted wealth. As we emphasize in this chapter, gold’s power lies in its effectiveness as a measure. A gold-based system can work even if a country doesn’t own a single ounce of gold.

  Gold Doesn’t Mean a Fixed Supply of Money

  Gold is far less rigid than most people realize. It is both flexible and stable. Contrary to the common perception, it allows the monetary base to grow, or to shrink, in response to transactions and monetary demand while preserving the value of money. A gold standard no more means a fixed supply of money than a use of the metric system means there has to be a fixed number of rulers.

  Why Not Silver or Something Else?

  Why gold? After all, as we’ve discussed, many commodities throughout history have been used as currency. Gold, however, is the best way to sound money because it maintains its value better than anything else on earth. It is to stable, long-term purchasing power what Polaris, the North Star, is to determining direction—that is,
an unchanging fixture, a constant.

  Gold is indestructible. You can freeze it, heat it, smash it or burn it, but you cannot destroy it. It doesn’t rot. It is not prey to termites or rodents or disease. Its chemical composition never changes nor does its weight if you melt it down. Gold is tough but malleable enough to be shaped into coins or bars. Unlike the fei that we mentioned earlier, the precious yellow metal packs considerable value into a tiny amount of space, making it easy to use and transport.

  Gold is not subject to droughts or abundant harvests that can produce the supply shocks experienced by wheat or corn. It is not consumed or burned like oil or natural gas. Gold is mostly used for jewelry and other ornaments and as a reserve of value. Gold has some industrial uses and was once employed by dentists for fillings in our teeth. But these have little effect on supply, constituting a fraction of the amount of gold mined each year.

  All the gold that has been mined is still in existence, over six billion ounces. Experts estimate that more than 90% of it is accounted for today. The rest is either buried in the ground, having been lost by careless owners, or lying at the bottom of the ocean. As Roy Jastram put it in his classic work The Golden Constant, “The ring worn today may contain particles mined in the time of the Pharaohs.”