NCPA - National Center for Policy Analysis

Gold As Anchor And Economic Reference Point

June 28, 2001

Former GOP vice-presidential candidate Jack Kemp is making a case for a return to the gold standard in order to stabilize the dollar and avoid a future economic calamity.

Others have warned in similar terms:

  • Ronald Reagan once said he knew of no great nation in history that went off the gold standard and remained great.
  • When the U.S. in 1971 ceased to redeem dollars held by foreign governments for gold, economist Milton Friedman called the situation "unprecedented" and said it is "not a long-term viable alternative." The world, he said, "needs a long-term anchor of some kind."

Kemp acknowledges that we have so far avoided catastrophe. But he cites instances of the drawbacks of having no gold standard.

  • When the U.S. ceased redeeming gold at $35 an ounce, its price quadrupled on world markets to $140 -- followed in 1973 by a quadrupling of OPEC oil prices.
  • That prompted stagflation, wage and price controls, and high marginal tax rates.
  • He believes that energy price hikes now working their way through the economy are being misconstrued by the Federal Reserve as inflation and charges that central bank errors in the discretionary management of floating fiat currencies have put the entire world economy at risk.
  • Kemp argues that without a gold standard, the Fed has no means of determining how much liquidity markets demand -- and all it does by targeting interest rates is guess how much liquidity to inject or withdraw to counteract mistakes it made earlier.

Under a gold standard, he suggests the Fed stop targeting interest rates and begin targeting gold directly -- not by fixing the price of gold by administrative fiat, but by calibrating the level of liquidity in the economy to keep the market price of gold stable within a narrow band closer to $325 than $275.

The Fed would add liquidity by buying bonds when the price of gold tries to fall and subtract liquidity by selling bonds when the price of gold tries to rise.

Source: Jack Kemp (Empower America), "Our Economy Needs a Golden Anchor," Wall Street Journal, June 28, 2001.

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