Tuesday, September 25, 2012


German’s central bank is the lone dissenter from the European Central Bank’s policy of aggressive bond purchases. And a much deeper process also may be under way, one entailing a public recognition of the virtues of the gold standard.

On September 16th, Die Welt, a German national daily newspaper (also available in 130 countries) published a financial analysis unflinchingly favorable toward the classical gold standard, with a headline, Warum der Goldstandard doch funktioniert, which might be translated as Why Does the Gold Standard Work?

Pull quote:

During the crisis, the growing desire of many people to adopt a monetary policy that is oriented similarly to the time of clear rules, not on political motives. The distrust of paper money is now so great that the U.S. Republicans have decided the election campaign, a commission established to examine a return to the gold standard.

Its authors, Daniel Eckert and Holger Zschapitz, show a confident grasp of monetary policy.  They present as more pessimistic about whether the politics will permit the restoration of the gold standard than the circumstances objectively warrant.  Apart from that, they lay out a highly sophisticated, fully sound, analysis.  Their report effectively disposes of the claims of the gold standard deniers — crises, for example, were limited, more so than under that of fiduciary paper money.  They address the remonitisation of gold, quoting economist Detlev Schlichter, who “argues in his book ‘Paper Money Collapse’ that remonetisation of gold had already started.”  They talk about how central banks are beginning quietly to add to their gold stocks, and provide an erudite historical record … presenting, quite correctly, that the classical gold standard was a success story, interrupted by World War I, and followed by a failed “mixed system” — referring to the unstable “managed gold,” or gold-exchange, standard.  Their assessment of the fundamental defect in the fiduciary paper money standard is succinctly devastating:

The problem with the current monetary system is that the central banks are increasing because of their political goals a measure misplaced, to anchor the value of money. This confuses the world economy. The classical gold standard was offset not only inflation but also asset bubbles as well as over-the trade deficits and surpluses.

A nation imported more than it exported, flowed from gold. In response, the central bank was forced to raise interest rates in order to attract gold back into the country. The import propensity dampened in the domestic economy and strengthened over falling prices, exports. “Imbalances were offset in the gold standard, faster – and without political intervention,” said Skene.

A gold standard is economic stability and the prevention of large speculative bubbles. From 1843 to 1914, the long-term interest in the UK varied only from 2.4 to 3.6 percent. That made a long-term planning for citizens and businesses easy.

To fully appreciate the possible significance of this piece one must bracket it with two contemporaneous developments in Germany.  The first of these was a September 18th speech by Dr.  Jens Weidmann, the president of the Bundesbank, extolling gold (at least from a cultural perspective, with indications of more than that) and indicting inconvertible paper money.  The second, also dated September 18th, was an important paper published by Deutsche Bank presenting gold, rather than as a commodity, as good money that is, pace Gresham’s Law, being driven out of the financial system by bad, paper money.