Under a Revived Gold Standard, $800 Should Be the Goal
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"- Andrew Mellon
When people ask what is the most valuable book today on the gold standard, I always point them to Nathan Lewis's Gold: The Once and Future Money. Increasingly known around the world, Lewis's work is the ultimate primer on a monetary system that is essential if we as individuals want to achieve our full economic potential.
Assuming a serious return to gold-defined money Lewis's views on the subject will almost certainly (hopefully) carry a lot of weight, and as evidenced by his frequent Forbes columns on the subject, Lewis has a very informed understanding of how such a return to stable money values will occur. Lewis, in the words of his late colleague Jude Wanniski, is very much the "man on the margin" at a time when the horrors of floating money values are increasingly apparent.
Of course one of the debates within the stable money movement concerns the price at which the dollar should be re-linked to gold. Lewis and I somewhat disagree in this area, though disagreement is an overstatement.
First up, in Lewis's perfect world a return to the gold standard would be announced, and then over a set timeframe markets would settle on a proper price for the dollar in terms of gold. Barring that, though he's not adamant about it, Lewis thinks any gold/dollar link should fall close to where the dollar is now. So with gold trading around $1600/ounce, Lewis would probably desire a $1500 peg.
About his presumed number, it should be stressed that if $1500 is what it takes to return to gold, we should embrace it. With vigor. Though it's wildly misunderstood by most in the economic commentariat, the sole purpose of money is to facilitate the exchange of goods.
It can't be stressed enough that money isn't a commodity, rather money is a measure. Just as a foot is twelve inches, money should be a measure of something stable. Gold has defined money well for thousands of years precisely because it's the most stable measure of value known to mankind.
So with stable money in mind, gold should be the definer of the proverbial paper ticket. Unstable money values lead to chaotic pricing of investments and goods purchases in much the same way that an unstable minute would lead to a lot of burnt apple pies. Once this is understood it should be clear that stability of the measure of value is the goal, and if $1500 is the only way that it can be achieved, we should embrace that number.
Another argument in favor of Lewis's number is historical. A departure from gold is tautologically a devaluation, and as England's return to gold after WWI most famously revealed, a return to gold at the previous, non-inflationary level can at least on a superficial (think GDP) level have a very negative economic impact.
To varying degrees the price of everything has changed during the floating money period, so to avoid a deflation that drives up the cost of debt in concert with falling prices that reduce nominal profits, it's believed that in returning to gold we shouldn't strengthen the dollar too much. England certainly did strengthen the pound in returning to gold after WWI, and the headline result (exacerbated by tax rates that remained at wartime levels) was a major recession that eventually forced it back off of the gold standard.
With an eye on stable dollar permanency, Lewis and others argue that returning to a dollar defined as 1/250th of a gold ounce (where the dollar stood as late as 2001), or one that buys 1/800th of an ounce (gold's ten-year average price) would discredit the idea altogether. Their valid argument is that $250 or $800 gold would constitute a wrenching recession, so the better answer is to accept the dollar's 10-year devaluation on the way to $1,500 gold.
They have a point, and once again if a devalued but stable dollar is the price of returning to gold defined money, this would be the cheapest of bargains. But it's not ideal.
Indeed, to achieve the fully positive impact of a return to gold it's important to peg the dollar at 1/800th of a gold ounce. The reasons are basic:
First up, underlying stable money values is the all-important debtor/creditor relationship. For someone to borrow money someone must be lending it, so while a return to $800 gold wouldn't equalize debtors and creditors in total, it would be the fairest of a lot of unfair solutions. A 10-year average of the dollar's price would arguably most equalize both sides. This is important given the simple truth that borrowers only exist insofar as lenders do, which means it's essential that monetary authorities not favor one over the other.
Second, painful as they are in the near-term, recessions are necessary and cleansing. Reaching back to Andrew Mellon's essential utterance from the Depression era, a great deal of faulty investment and inefficient labor usage has worked its way into the U.S. economy since the dollar's long march downward began in 2001. To truly get the economy back on sound, forward looking footing, it's important that a lot of this mal-distribution of capital and labor be cleansed. $800 gold would be very useful in this regard.
Considering oil alone, the modern rush to an energy economy promoted by commentators who should know better violates comparative advantage, is heavenly for tax collectors as evidenced by how heavily oil profits are taxed, and it's wholly rooted in a cheap dollar. Assuming $800 gold, oil would quickly correct to $50/barrel, and in the process a lot of energy plays currently generating a lot of investor excitement would soon be exposed as wildly non-economic. Some might correctly point out the looming bloodbath that such a scenario would present for commodity locales, but then the vast majority of us not dependent on commodities for our economic existence have suffered nosebleed gasoline and food prices (and much slower economic growth) for 10 years. As such, it's not our job or obligation to pay for economic activity that only exists insofar as our paychecks shrink in value.
After that, a move away from an energy economy and the economically crippling desire for "energy independence" that a strong dollar will facilitate promises very positive long-term gains. Indeed, as we learned in the Reagan ‘80s and Clinton ‘90s (the last time a strong dollar reigned), the metaphysical economy that a much sounder dollar would foster greatly trumps (compare stock market returns from the ‘80s and ‘90s to the commodity driven ‘70s and ‘00s) the limping commodity economy now being experienced. So while the worthless number that is GDP would signal "recession" in the very near-term should we return the dollar to its 10-year average price, the latter is what's necessary to get the economy back on a booming path free of all these commodity detours that signal an economy moving backwards.
Importantly about all of this, we shouldn't let perfection be the enemy of the very good. A stable dollar is the goal here, and even assuming a peg at $3,000/gold ounce, this would be better than the floating dollar that is presently bringing so much harm to our economic chances.
But since a stable dollar defined in gold for now still constitutes hope over reality, a discussion of the best way to return to a gold standard and booming growth is worthwhile. If so, it says here that a lot of faulty investment and unemployment wormed its way into the economy during the Bush/Obama years that needs to be reversed. $1,500 gold would certainly achieve some of the needed cleansing, but $800 would truly reverse our flight to the real on the way to much greater economic growth down the line.