Originally posted Thursday, May 31, 2012
What should be the price parity of dollars to gold? Why?
John Tamny, editor of RealClearMarkets and Forbes.com Opinion, and advisor to http://thegoldstandardnow.org, recently wrote with great lucidity about the repricing of the dollar when gold convertibility is restored. We advocate a market exploration period to determine the appropriate price. Tamny lays out the conceptual parameters well.
The definition of the amount of gold that defines a dollar represents a balancing act between debtor and creditor. If the dollar is defined at $800 an ounce that is far more beneficial to creditors. $3,000 an ounce is a definition far more beneficial to debtors. It is important to strike an equitable balance. It is crucial to resolve the price and thus fix the measure.
Tamny:
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.
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, [Nathan] 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.
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.
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