Recently by Gary North: Dancing on the Grave of the Keynesian System
There is talk of a plank in the Republican Party’s platform calling for a gold commission. The commission will study the possibility of re-establishing a gold standard.
The likelihood of a positive recommendation coming out of such a commission is as likely as a positive report of another commission to study the feasibility of restoring the Articles of Confederation.
I did a Google search on these terms: “gold commission,” Republican, platform. I got 20,000 hits.
That’s not too bad. I always like to see public interest in the restoration of gold as the backing for the U.S. dollar.
But there is a lot of deja vu about this. We have been down this yellow brick road before. It is nothing but gold-painted bricks all the way to the Emerald City: Greenback heaven.
In 1980 Senator Jesse Helms persuaded a Democrat- controlled Congress and Jimmy Carter to sign into law a call for a gold commission. Under those circumstances, you can imagine how seriously the President took the bill. But Carter was trounced by Reagan later that year. This offered hope to the more naive gold bugs within the camp of the faithful.
Under Reagan’s Secretary of the Treasury, Donald Regan, plans went forward. In March 1982, the Gold Commission began meeting. The Secretary of the Treasury filled the commission with anti-gold Keynesians and monetarists — followers of Milton Friedman — who also favored the Federal Reserve. There were only two pro-gold standard members: Ron Paul and Lewis Lehrman. Out of the Gold Commission came a majority report, which opposed the gold standard, a minority report by Paul and Lerhman, and a detailed history of the legal foundations of the U.S. dollar by Austrian school legal scholar, Edwin Vieira. You can download all three documents here.
The Commission did recommend that the U.S. Mint start producing gold and silver tokens, or medallions, sometimes called coins. The Mint did this. We can still buy gold and silver eagles.
A PARTY PLATFORM
The political platform that emerges from a party’s national convention in a presidential election year is one of the great curiosities of American politics. After the President is elected, no one in the party ever mentions the political platform again, with the possible exception of a few political enemies in Congress. This is because nobody took it seriously when the plank was included. The only thing more useless than a political platform of a victorious President is the political platform of his opponent.
It never ceases to amaze me that political factions within the party work very hard to get their proposed planks into the platform before the end of the convention. There is a lot of political maneuvering associated with a political platform. Why is this?
A political platform is a statement of faith that the voters ask the politicians to provide. It is quite comparable to the phrase, “Will you still respect me in the morning?” Once the platform emerges from the convention, it will have approximately as much meaning as the assurance, “Why of course I’ll still respect you in the morning.”
A plank in a party platform is usually written in final form by the people who screen the platforms. The faction within the party that supports the plank is not going to get anything else out of the party after the election. It is the one doffing of the cap by the people who are in charge of the political party. This is all the minority faction is ever going to receive. The plank is a great pretense on the part of the people who make the decisions that they are going to pay attention to the particular faction which is lobbying to get the plank into the platform. If anyone in the minority faction is so naïve as to believe that anything will be gained by getting the plank into the platform, he deserves to attend to the inauguration ball for $10,000, where he will sit on the far edges of the tables, right next to the kitchen.
HOW TO AVOID CONTROVERSY
During the election, the only people who pay any attention to the platform are politicians in the rival political party, who will use this or that platform plank to beat their opponents over the head during the election campaign.
It is not that anyone running for office actually believes that the opposing party intends to go to any great length after the election to implement the platform. Everyone understands that it is a charade that each party plays with the more extreme voters who are members of the party. The plank gives the leadership of the party a way to placate the extreme wings of the party, without actually providing anything of substance for the factions.
On the other hand, the leaders of the party do not want to put anything into the platform that is so radical that it might cost some political candidate more votes than it gains from the na‹ve within the party. The political leaders do not want the mainstream media, which is controlled by the Left, to pick up on a particular platform plank and use it to embarrass the political party. This is why the planks in the Republican Party’s platform are more important than the planks in the Democrats’ platform. This is because the mainstream media are always more alert to extreme positions in the Republicans’ platform than they are to the extreme positions in the Democrats’ platform.
Again, nobody with any political sophistication believes that a plank in either platform is going to be taken seriously if members of Congress think that any attempt to vote for a bill that implements the platform is going to cost the party a humiliating defeat in Congress. The leaders are interested in platform positions which they do intend to pass, assuming that the attempt does not cost them a lot of embarrassment. So, some of the platform planks will be taken seriously when the new Congress is installed — the ones that cost few lost votes.
Because comparatively few bills are passed by Congress these days, and fewer still get signed into law — under 200 during the two-year term — only those bills that generate very little controversy will be signed into law. Only if a political party controls both houses of Congress, and also controls the presidency, is anything even remotely controversial with voters going to be proposed and passed in Congress. The last time anything like this happened was Obamacare, which is in fact Pelosicare. It probably cost the Democrats the House of Representatives in 2010.
So, I do not expect anything to come of the call by the Republicans for another Gold commission, even assuming that Romney wins in November. Any bill that went through the Democratic Congress and got signed into law by Jimmy Carter is not what I would call a threat to the Federal Reserve System.
There will be a gold commission called by President Romney, if there ever is a President Romney, it will reflect the prevailing opinion in the Republican Party regarding the legitimacy of the Federal Reserve and the need to get the Federal Reserve to serve as a lender of last resort when the Treasury has to raise $1.2 trillion a year in order to keep the doors open.
THE LENDER OF LAST RESORT
Over the last year, mainland China has begun to sell U.S. Treasury debt. It is not flooding the market, but it has sold a little under $164 billion worth Treasury debt since June of 2011, or about 11% of its holdings. Japan increased its holdings, so there has not been a collapse of demand.
The Treasury Department does have to face this scary possibility, namely, that the mainland Chinese central bank is not going to the Treasury any longer. On the contrary, the People’s Bank of China may be selling Treasury debt for dollars in order to buy other currencies. It can use these currencies to enable the government to buy commodities or other assets in international markets.
Under these circumstances, the Treasury has to be sure that the Federal Reserve is there to purchase its debt, should the increased demand for borrowed money, when coupled with a decreased demand for Treasury debt, combine to produce higher interest rates in the capital markets for U.S. Treasury debt. Under those circumstances, Congress will want the Federal Reserve to intervene and buy its debt, in order to hold down the rate of interest the Treasury must pay to persuade lenders to hand over their money.
This means the Federal Reserve will have to continue to increase its holdings of Treasury debt. This means the Federal Reserve must be allowed to increase the monetary base at any time. As long as commercial banks are not lending money into the economy, but instead hold excess reserves of the Federal Reserve, increased purchases of Treasury debt by the Federal Reserve will not lead to a round of price increases. But, at some point, banks will start lending to the general public, if only to get a positive rate of return on their capital, and at that point consumer prices will begin to move up, as will long-term interest rates.
So, there is no interest in Washington in the proposition that the way to gain long-term predictability of the money supply, which means long-term predictability of prices in general, is to reestablish some form of a government manipulated fixed-price for gold. The government would have to deliver gold on demand at this fixed-price, the way it did prior to August 15, 1971. There is no economic school, other than Austrian economics, that has called for this kind of gold standard. I mean a gold coin standard, where citizens who hold dollars have the ability to exchange those dollars for gold coins at a local bank at an official price.
This would mean handing over sovereignty over money to those people who buy and deposit gold coins in banks. This would mean that those people who tend to be suspicious of Federal Reserve policy would be given a tool that they can use to restrict the expansion of the money supply. It would give holders of gold coins a way to cast a veto against the deficit spending of Congress. Congress is not interested in transferring such authority to private citizens.
THE SILLINESS OF COMMENTATORS
Forbes ran an article on August 27 that showed optimism regarding the possibility of a pro-gold plank.
The dogmatic Left is going into full “Sound Money Derangement Syndrome.” Reuters captured leading Birkenstock School economist Brad DeLong in full seizure: “Brad DeLong, a Berkeley economics professor who served as a Treasury official during the Clinton administration, said (of Paul Ryan’s commitment to a rule-based monetary policy): Quite frankly it is terrifying. Price stability is one goal of macroeconomic management, but only one goal: there are others. To command the Federal Reserve to pursue price stability alone is to create the preconditions for macroeconomic disaster.'”
While I always welcome the opportunity to terrify Prof. DeLong, secure in his tenure at a tax-supported university, and always faithful to his Keynesianism, I don’t think he has anything to worry about.
Price stability has not been a policy goal of the United States government since approximately 1933. I never recall any Keynesian economist calling for price stability in the face of an increase in the consumer price index below 5% per annum. The only year in which there has been a decline in the consumer price index was 1955, when it dropped by about 1%. I assume that a policy objective that has not been obtained more than once in the past 70 years should not be regarded as a serious policy objective by the Federal Reserve or the United States Treasury.
The Left attacks the idea as being out of the mainstream. Our Forbes author protests.
In indicting the gold standard as “out of the mainstream” Left, showing its fashionable alienation from core American values, takes a jackhammer to much of Mt. Rushmore — and other of America’s iconic founders. Anti-paper-money stalwarts include such weirdos as George Washington, John Adams, Thomas Jefferson, James Madison, Alexander Hamilton, Thomas Paine, and John Marshall. Paper money had very few, and no distinguished, defenders.
That was true in the nineteenth century, the century of price stability and the most rapid compound growth in human history. But the Democrats abandoned this position in 1896, except for the candidacy of the long-forgotten Alton B. Parker in 1904. That was the last time the Democrats promoted the idea. Eisenhower was the last Republican President to promote it. Nixon killed it.
Generally speaking, when a political idea has been out of favor with all Party nominees running for President for a generation, and has been out of favor by virtually all economists ever since the early 1950s, I think we can safely assume that the idea is no longer mainstream.
IT’S FEAR OF RON PAUL
It is clear what this is really about. It is about real fear within the Republican Party’s hierarchy that those voters who favored Ron Paul’s candidacy, and who are now unwilling to support Romney, may not go to the polls in November. They may do something unheard of, namely, writing in Ron Paul’s name rather than vote for Romney.
If Romney loses, and Ron Paul’s name appears on enough ballots in swing states to cause this loss in the electoral college, the Republican Party establishment will find itself boxed in. It will find itself beholden to the tea party. If it thinks that he cannot win without the tea party, the leadership will decide not to win.
If it is a question of surrendering to the tea party, especially on the issue of gold, the American establishment at the highest levels would be perfectly willing to see the election of nothing but Democrats for the foreseeable future. It is a question between the sovereignty of the Federal Reserve to inflate and the sovereignty of gold coin owners establishing the terms of exchange, the Republican establishment will do exactly what it did in 1964 at the Republican national convention. It will walk out, and it will get behind the Democrat.
The plank on the gold commission is not a meaningless gesture. It is not meaningless, because the establishment believes that it is required. It is not meaningless, because the platform acknowledges the existence of a significant faction within the Republican Party. The biggest swing vote faction is now the tea party. It used to be the New Christian Right. These days, however, the hard-core free market members of the New Christian Right have defected. They have moved to Ron Paul, which means they have moved to a position totally opposed to the Federal Reserve. This means they have moved to the idea of a gold coin standard. No one else in politics supports it. No one else openly calls for ending the FED. When he moves to the next phase of his career, he will keep this idea alive.
So, while it is true that Prof. DeLong does not have anything to worry about in the near-term, he does have something to worry about in the long term. When the government of the United States finally declares bankruptcy, either openly or by a series of defaults on its Medicare and Social Security obligations, there is going to be an opportunity for a serious political transformation of the United States if the tea party begins at the lowest levels of government, namely, the county level, and works for a decade or two to establish a stronghold politically at the local level. Whenever the default comes, as it must inevitably come, the Republican Party is going to fall into the hands of the tea party. That is worth worrying about if you are a Keynesian professor employed by a tax-funded university.
Pay no attention to any call by the Republican Party to set up a commission to study the feasibility of restoring the gold standard. It has no meaning in terms of policies that are going to be established by the Republican Party, should Mitt Romney win in November. But you should pay attention if the Republican Party establishment decides that it is necessary to put the plank into the platform. This has nothing to do with the content of the plank. This has everything to do with the fear of the Republican Party establishment that the tea party is going to stay home in November. If it does, Romney is going to lose the election.
August 29, 2012
Copyright © 2012 Gary North