Presentation of J. William Middendorf II

Presentation of

J. William Middendorf II

at the

Mundell Rountable Conference on Global Money

Palazzo Mundell, Siena, Italy

July 9-11, 2011

Some thoughts on monetary reform,
the role of gold in such reform,
gold supplies and fiscal tomfoolery 

I read with interest the report of Bob Mundell’s interview with Pimm Fox on Bloomberg (May 26th) on money and gold. The good professor was kind enough to elaborate on his comments to me, for which I am most grateful. It got me thinking about how the current and future monetary problems in Europe and the U.S. might be solved by moving toward mobilizing the gold reserves in Europe and the U.S.

There are some added questions and it seems that they are all more political than economic. Of course this is speculative and any movement toward monetary reform is dependent on political forces making reform possible.

As you put it, it isn’t impossible that some nations might consider it to be in their national interest to fix gold and Europe has more reserves than does the U.S. I understand that you think that it more logical for central banks to be the only official traders of gold within such a system and this has historical precedent.

Of course, should the U.S. and Europe be paftners in such an agreement – that both the European Central Bank and the Federal Resele agree to fix their currencies in terms of a set quantity of gold, then the currencies themselves would effectively be pegged to each other. This would bring the advantages of greatly reducing the costs of trans-Atlantic trade and saving the costs of cuffency instabilities that are bome today by both trading partners.

One question that comes to mind is the experience of the Bretton Woods system. That too, allowed only central banks to redeem cllrrency for gold. And since central banks are inherently political institutions, one might ask if politics might prevent automatic corrections from occuning should one currency or another appreciate or depreciate. In the past, under the Bretton Woods system, individuals or individual banks could not redeem curency for gold. Thus when profligate fiscal policy in the 60′s lead to an inordinate increase in the U.S. money supply, we saw Lyndon Johnson blackmailing the Germans with a threat of troop removal lest they cash-in dollars for gold. It seems that this weakness of Bretton Woods should be remedied in any future gold standard by allowing the public to impose the discipline of gold on the monetary authority and thus the fiscal policy makers. Under the classical gold standard individuals were allowed allow to get gold for currency whenever they felt that there was a danger of the loss of value of the currency. This shift of gold out of the banking system in a traditional gold standard, meant that there was a diminution of the money supply more in line with demand.

Judy Shelton makes this point in her excellent Wall Street Joumal article of July 6th. “Gold Serves to enforce monetary discipline only if people (emphasis mine) can redeem cuffency at the fixed-convertibility rate when they suspect increases in money and credit are unwarranted by the economy’s real growth prospects.”

One might speculate on the international impact of a dollar or a euro as good as gold. Logically, if it were credible, it would make the euro into a world reserve currency, and supplement the current role of the dollar. With planetary economic growth comes a need for added central bank reserves. In other words, a credible standard would likely ease the ability of the U.S. and the euro community to finance its debt while it shifts to more rational fiscal policies.

Is the alternative to monetary reform and fiscal policy reform, the stagflation of the Carter years? In an inflationary spiral, interest rates demanded would soon be translated to the interest rate paid on the national debt. Logically, then massive consequences would follow. Let us speculate for a moment. The Congressional Budget Office estimates projected deficits in the next ten years of an added $9.7 trillion. Add that to the current $14.3 trillion debt for a total of $24 trillion. And, what if that sum would have to be financed at stagflation rates of up to 12%? A $24 trillion debt financed at 12%(which ten-year Treasuries hit in 1981) would cost an annual interest payment of $ 2.88 trillion – a sum which exceeds total projected federal revenues for next year.

Now, a credible gold standard would greatly reduce that possibility and would bring added economic benefits, not the least of which is lowing the risk of investment and savings and thus increasing economic growth. US/European trade would be greatly facilitated by the stability of fixed exchange rates and other nations would logically “fix” so as to take advantage of this benefit.

Given the experience of the late 1960′s , 1970 and 1971 when the Bretton Woods international monetary system collapsed, skeptics might argue that a system restricting gold exchanges to central banks would hold little promise to assure long-term monetary stability. They might reasonably argue that a truly credible gold standard must remain as insulated as possible from the political pressures of governments willing to embark on foolish fiscal policies. Surely, if money supply is created without regard to the value of the currency, a new gold standard would face a run on it as did the Bretton Woods system at its end. A stabile gold standard would allow the money supply to change as the market dictates – not the politician – to keep stabile the price of gold and the thus the value of the unit of currency. A run on such a currency would be futile, because an apparent reduction in the demand for the currency (indicated by an uptick in the price of gold), would be automatically handled to reduce the apparent over-supply.

There are other skeptics that ask whether the U.S. actually has the claimed gold reserves. Congressman Ron Paul, Chairman of the Subcommittee on Monetary Policy and Technology of the House Banking Committee has called for an independent audit of the gold reserves at Fort Knox. No such audit has been undertaken since 1955.

The status of the gold reserves is a political question with some saying that there is no gold left in Fort Knox. We do know that in the late sixties and up to August 15,197, when Nixon closed the gold window, thousands of tons of gold were claimed by the French. The Swiss, too, claimed at least $50 million in July of 1971. But the French were by far the greatest takers of the gold.

One concern is that much of the U.S. gold reserves are not “good delivery” gold. In other words it is not gold that has been refined to .999 pure gold. In fact there is reason to believe that during the ’60′s when there was a run on the dollar, most of the U.S. good delivery gold was claimed by France and others exercising their right under the Bretton Woods system to get gold for dollars at $35 per ounce. The bulk of our gold reserves today may be ingots of melted gold coins which were called in by the Roosevelt administration in 1932.

In fact, under President Ford, then Secretary of the Treasury William Simon oversaw the sale of roughly three million ounces of gold in four sales of approximately 780,000 ounces each. Of interest is that those were sales of coin-melt ingots.

Some people say that the current U.S. supply of gold, with a current market value of $228.1 billion is not much compared with the trillions of debt. But, it is the largest single supply of gold in the world – 8,13 1.5 metric tons or 162.7 million troy ounces. Most of that is in Fort Knox – roughly 4,578 metric tons – with the remainder spread between West Point, the New York Fed and the various mints.

Sales of gold reserves would do little to affect the debt, but mobilization of the gold reserves to establish a true gold standard that could promise generations of stable money would do much to put the world’s economy on a pro-trade, pro growth path.

Should the Euro adopt a gold fix without the dollar, it could be expected that the euro would gain over the dollar. A gold-backed euro, accompanied by rational policies would stimulate investment and lead to higher levels of employment and economic growth.

S. S. Tarapore, former deputy governor of the Reserve Bank of India has espoused a gold standard. Zhou Wiren, a member of the People’s Bank of China Monetary Policy Committee agreed, saying, “a gold standard would effectively prevent each country’s government from recklessly levying ‘inflation taxes’ domestically and passing troubles to others by manipulating currency exchange internationally.”

Finally, in answer to the question: “What price?” we should refer to Senator Jesse Helm’s Gold Reserve Act of 1982, which posited a return to the gold standard at a market-determined price – the market price on 12:01 a.m., January 1st after enactment. In other words, the market will react and buy or sell gold on the supposition that the dollar will be as good as gold after a date certain. It would determine the correct gold/dollar ratio that will not precipitate inflation (if the “price” were too high) or a deflation (if the “price” were too low).

Congress would have to relieve the Fed of the Keynesian responsibility of boosting demand to boost the economy: monetary stability itself creates jobs. Keynesian demand stimulus hurts the economy and manipulating the value of the currency destroys jobs. Under the gold standard the Fed would be charged with changing the monetary base so as to keep the COMEX price of gold practically at the target price. This system would allow for an expansion of credit to allow for non-defl ationary and non-infl ationary economic growth.

Gargantuan educational hurdles remain: politicians and policy leaders must leam about the rational gold standard alternatives and their benefits; we must educate all who support “sound” money; and that we educate those opinion leaders in the voting, general public.

As Judy Shelton put it, “The absence of a gold anchor – the immutable firewall between fiscal indulgence and compromised currencies–dooms the integrity of both the dollar and the euro. Former Fed Chairman Alan Greenspan rightly observed earlier this year that they are both ‘faulty fiat currencies.’

Crises are opportunities. We have been given an opportunity.