James Grant Says Go With Gold
By Staff News & Analysis - December 10, 2009

The dollar is a fundamentally damaged currency, and a return to the gold standard represents the best solution, says James Grant, editor of Grant's Interest Rate Observer. "A proper gold standard promotes balance in the financial and commercial affairs of participating nations," Grant writes in The Wall Street Journal. "The pure paper system promotes and perpetuates imbalances." Investors around the world are losing faith in the dollar, he points out. "It's not that the dollar is overvalued – economists at Deutsche Bank estimate it's 20 percent too cheap against the euro," Grant says. "The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors. … The dollar is faith-based. There's nothing behind it but Congress." Grant has harsh words for Federal Reserve Chairman Ben Bernanke. "You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation, fails to understand that the pure paper dollar is a contrivance only 38 years old." The U.S. abandoned the gold standard in 1971. "The experiment may yet come to naught," another point Bernanke is missing, Grant writes." – MoneyNews

Dominant Social Theme: Gold is good.

Free-Market Analysis: So James Grant, ever casting his eyes backward in a witty way, wants to return to a gold standard. This would certainly be an improvement over what we have now, which is really nothing. But even a gold standard may not really be the best idea. An even better idea would likely be a gold and silver standard of the kind that America had in the 1800s.

But the best way of having a gold and silver standard, or any other form of monetary standard, is to have a private one – to let the free-market decide. If the market chooses gold and silver and decides on a certain ratio between the two in one region and a different one in the next, well that's fine. People are willing to pay different prices for fruit, but for some reason everyone has the idea that money should be homogenized.

The same thing goes for interest rates. People tend to believe that rates should be the same countrywide and even worldwide. But in the 1800s, during American free-banking days, interest rates varied from region to region as did the rate of inflation and deflation. In fact, one town or region could be down in the dumps while another region was doing quite well. That's the beauty of elastic, unregulated money. You get a vibrant patchwork of economic success, and if things aren't working well in one place, well, you can always pick up sticks and move somewhere else.

NOTED: The Telegraph is reporting that "Barack Obama administration has offered to spend $3 billion (£1.8bn) to settle a long-running lawsuit with native American tribes that claim they were swindled out of billions of dollars in royalties for oil, gas, grazing and other leases dating back more than a century …" So is this the beginning of the REAL payoff? We're not certain of the terms of the deal, but if contains any aspect of compensation for Native Americans based on general pain and suffering then we're agin' that part of it. Reparations for treaties that weren't honored are potentially justified. And even compensation to aggrieved individuals yet alive. But reparations for ills that took place hundreds of years ago are invitations to lunacy. The Clintons may have walked away with silverware from the White House, but is Barack Obama setting the table for the biggest heist of them all, the one that will take place if and when the argument can be made that every person of color in America whose family touched slavery is entitled to after-the-fact compensation?

After Thoughts

The powers-that-be keep droning on about globalization and the need for homogeneity. In fact, the gold standard did bring some of that, though in a flexible way. And we would argue that the more flexibility you can have in an economic system, the better off you are. The best system might be a naturally occurring gold-and-silver private market standard of the type that worked remarkably well in various places throughout history. That would be the most flexible too, and the most robust when it came to combating inevitable economic downturns.