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Economic Error #20: Gold's Price Fluctuates Wildly. So, It cannot Serve as a Base for Money.

Gary North
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Ellen Brown opposes the gold standard. So do all Keynesians. So do all Chicago school economists. So does virtually every central banker on earth. They all oppose it for the same reason: it restrains governments in the expansion of money. Ellen Brown writes the following:

The Bretton Woods gold standard worked to prevent devaluations and huge trade deficits like the United States now has with China, but gold ultimately failed as a currency peg. The U.S. government the global banker had insufficient gold reserves for clearing international trade balances, and it eventually ran out of gold. Gold alone has also proved to be an unstable measure of value, since its own value fluctuates wildly. Some new system is needed that returns the virtues of the gold standard while overcoming its limitations. [Web of Debt, p. 438]

First, the Bretton Woods gold standard was not a gold coin standard. It was a dollar standard. The central banks of the world agreed to hold United States Treasury debt instead of gold. They got paid interest by the government on the U.S. debt that they held. Gold pays no interest.

Second, the international banking community had not used gold to settle accounts since August 1914, with the outbreak of World War I. The world was on a paper money standard, supported only by two currencies: the British pound and the United States dollar. After World War II, it became obvious that only the United States government was large enough to guarantee the interest required to persuade the whole world to buy Treasury debt and hold it instead of gold. The whole world had abandoned gold anyway, so it figured it was safe to hold Treasury debt.

The reason why the Bretton Woods agreement broke down is simple: the United States kept creating digital money, year after year. So, on August 15, 1971, President Nixon reneged on the promise, closed the gold window, and destroyed the Bretton Woods agreement. The agreement had rested on the assumption: the United States government is trustworthy. That was a foolish assumption, and so the Bretton Woods agreement collapsed in 1971.

Third, the reason why a nation adopts a gold coin standard is because the voters understand that they are at risk if the national government has the right to create paper money. A gold coin standard is a system that restricts the issuing of money to IOUs to gold, which means that paper money or digital money is legally exchangeable for specific quantities and fineness of gold coins. If the government inflates, people can take go to a bank and exchange the money in their bank accounts for a predictable quantity and fineness of gold coins. When the government begins to run out of gold, is forced to restrict the expansion of money. So, the purpose of the gold standard is to make certain that gold reserves are sufficient to meet the public's demand for gold. It puts government in a golden straitjacket.

Fourth, it is this aspect of the gold standard that Ellen Brown hates. She wants the government to have no restrictions, other than those imposed by the government, to expand the money supply in order to build the modern welfare state. She sees gold, correctly, as the most important single restraining factor on government. The government cannot create a modern welfare state if it is restricted by a gold coin standard. Ellen Brown therefore wants to get rid of the gold coin standard.

Gold's price fluctuates wildly because the value of paper money fluctuates wildly. If you look at how much a suit of clothes or automobile costs in ounces of gold today, and you compare that with what an inferior automobile but possibly a superior suit would have cost 80 years ago, you will find that the gold price of those items has been remarkably constant. The wholesale price level of Europe in 1815 was approximately the same as it was in August 1914. This stability lasted for a century.

Ellen Brown does not like the gold coin standard because it restrains spending of government. This is why conservatives have always liked the gold coin standard. Conclusion: Ellen Brown is not a conservative.

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm


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