Wednesday, June 9, 2010

The Recovery Starts With Sound Money

By Judy Shelton
Atlas Sound Money Project
Thursday, May 27, 2010

The willingness to work for the sake of future prosperity is a universal human quality, but people must believe there is a link between effort and reward.

The euro is beset with fiscal calamities that threaten its downfall, and markets in the U.S. are roiled by uncertainty over the government’s financial regulatory legislation. But don’t worry. Treasury Secretary Timothy Geithner meets with European finance officials today to discuss the economic situation. According to a Treasury Department statement, they will focus on “measures being taken to restore global confidence and financial stability.” So everything is under control.


What government policy makers in the U.S. and Europe fail to realize is that far from being seen as capable of delivering economic salvation, they are increasingly perceived as primary contributors to global financial ruin. Whether it’s the fiscal recklessness of spendthrift politicians or the refusal of government officials to acknowledge failings—distorting mortgage markets through Fannie Mae and Freddie Mac, skewing assessments of credit risk through loose monetary policy—the influence of government over the real economy is proving disastrous.

No wonder people are flocking to gold as they flee government-supplied money. Neither the dollar nor the euro inspires much global confidence; despite the dollar’s relative safe-haven status, neither currency holds out the promise of financial stability.

How can the real economy, i.e., the private sector, where genuine wealth is actually produced, continue to function in the absence of reliable money? Europeans will be wary of the euro from now on, given that the European Central Bank has relaxed its standards for safeguarding monetary integrity by absorbing Greek debt. Meanwhile, the perilous fiscal condition of the U.S. has convinced many that our government will resort to future inflation to reduce its own untenable debt burden.

It’s hard to see how economic recovery can proceed when citizens suspect that the monetary foundation beneath them is crumbling away. The willingness to work and sacrifice for the sake of future prosperity is a universal human quality—the hallmark of entrepreneurial faith—but people must believe there is a link between effort and reward. Money forges that link by providing a dependable store of value; in doing so, it performs a vital social function.

The private sector is fully capable of recovering from economic downturn if individuals have a meaningful tool of measurement for evaluating alternative choices in a competitive environment. Comparisons based on accurate, free-market price signals yield optimal economic outcomes. But what we are witnessing today is a clash between the real economy’s will to resurrect itself and the persistent failure of government, here and abroad, to deliver an appropriate platform of sound money based on sound finances.

Even as the first inklings of rebounding growth can be discerned—increased retail sales, higher corporate profits—it takes only the latest headline about government failure to come to grips with deficit spending and accumulating sovereign debt to snuff out any potential market rally. Pledges to achieve balanced budgets by some distant future date do little to convince people that anything has really changed.

Tough rules to enforce fiscal discipline were part of the original plan for persuading Europeans to abandon national monies in favor of adopting a common currency. Limits on deficit spending and government debt were clearly stipulated in the Stability and Growth Pact—no more than a 3% budget deficit, maximum debt equal to 60% of GDP. But these criteria were quietly jettisoned years ago and have now been flagrantly breached en masse by European nations responding to the financial crisis with bailout packages and fiscal stimulus.

In the U.S., frustrations over Washington’s seeming inability to resist fiscal profligacy have found voice in the tea party movement. As national sentiment grows in favor of limited government and constrained powers, legislation has been introduced in nine states to nullify federal legal tender laws; the Fed’s monopoly on supplying the money U.S. citizens must use is being challenged by authorizing payment in gold and silver.

Invoking the 10th Amendment strictures of the Constitution, proponents argue that the Founding Fathers never intended to grant federal government both the right to borrow money as well as the power to manipulate the value of the monetary unit of account. Money linked to gold and silver retains its value, which prevents the medium of exchange from falling victim to the federal government’s inherent conflict of interest if it can fund its own debt with money created from thin air. Updated for our times, a number of the legal tender proposals specify that citizens would be allowed to tap electronic exchange-traded funds (ETFs) backed 100% by gold or silver to conduct digital transactions with state government.

The idea of rising above the administrative dictates of fallible government to reclaim the virtues of sound money is profoundly liberating—and could prove economically empowering. Who believes that officials in Brussels or Frankfurt will safeguard the value of euro-denominated savings in the face of political pressures? Who expects the “Financial Stability Oversight Council,” led by the Treasury secretary as prescribed in the regulatory overhaul bill, to spot the next asset bubble before it ruptures with catastrophic financial consequences for American retirement accounts? The transition to a firmer monetary footing to support entrepreneurial capitalism could be initiated by linking major global reserve currencies to gold and silver—commodities long associated with monetary functions. It would logically begin with the dollar. As a first step, U.S. citizens could ask Congress to authorize the limited issuance of gold-backed Treasury bonds that would provide for payment of principal at maturity in either ounces of gold or the face value of the security, at the option of the holder.

The level of public confidence in fiat dollar obligations versus gold would be revealed through auction bidding, with yield spreads clearly reflecting aggregate expectations of their comparative values. In the same way that inflation-indexed Treasury bonds measure expectations about future changes in the Consumer Price Index, gold-backed Treasury bonds would provide a barometer of the Fed’s credibility.

By linking the dollar to gold, Americans would establish a vital beachhead for sound money and provide a model that other nations could emulate.

Ms. Shelton, author of “Money Meltdown” (Free Press, 1994), is a senior fellow at the Atlas Economic Research Foundation and co-director of the Atlas Sound Money Project.

This article was originally published in The Wall Street Journal.

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