Inflation by Steve Forbes

Author:Steve Forbes
Language: eng
Format: epub
Publisher: Encounter Books

GOLD: THE WAY FORWARD

So how do we get there from here? A return to a world of zero inflation and sound money, achieved by a return to a gold standard, is entirely possible and far easier than many people think.

There are several different gold standard systems. Two have been put into practice. The first is the classical gold standard, which was used by the world’s largest economies from 1870 to the outbreak of the First World War in 1914. The other is the gold exchange standard, which was used after both world wars. Another two have been proposed: a 100 percent gold-backed currency; and what we call the gold price system. Each has its critics and supporters. But in all of these systems, the value of currency is linked to gold, which is the anchor of value.

This is not at all a novel concept. Dozens of countries today link their currencies to the dollar or euro for the purpose of achieving stability. The US would simply be linking the dollar to the precious metal whose value, over centuries, has proven more stable than any currency. Below, we outline a proposal for a new gold standard that would work in the twenty-first century.

A Twenty-First Century Gold Standard. Our proposal combines the fundamentals of the old systems, while avoiding their vulnerabilities. The United States doesn’t have to worry about stockpiles of gold. No need for those vaults with mountains of gold bars. All you have to do is keep the value of the currency linked to gold.

Under this system, the dollar would be fixed to gold at a particular price. That price might be decided based on a five- or ten-year average of recent gold prices, marked up as insurance against deflation. The Federal Reserve would use its tools, primarily open market operations, to keep the value of the dollar tied at that rate to gold. Just as currency boards do today, the supply of money would contract when the currency was a little weak and expand when the currency became too strong.

Easy Implementation. Implementing the program would take no more than twelve months. The government should announce a certain date when the conversion to a gold standard would take place. A gradual phase-in would help markets prepare for the return to gold-based money. During periods of weakening currency the price of gold reflects investors’ fears. The announcement of a coming gold standard would help calm such anxieties. A more natural gold price should reemerge, making it easier to arrive at the gold/dollar ratio. The transition period would also enable financial institutions and investors to adjust expectations about future interest rates and alter investment strategies to reflect a new environment of stable money. Global markets would make similar adjustments. The dollar would be permitted to fluctuate against gold with a range of 1 percent, the rate used under the Bretton Woods system for currencies against the dollar.

A Role for the Fed? The Fed would lose its “dual mandate.” No longer would the

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