Hoboken, NJ (October 2007)—If you’re a resident of 21st century America, you probably spend a good deal of your time worrying about money. Will I have enough to pay the bills? Did my property taxes go up again? Can I afford to send the kids to college? What will happen if I get sick? Isn’t it about time I got a raise? Consider the fact that most other Americans are fretting over the same things—and factor in the recent stock market fluctuations—and you start to realize that there’s a bigger issue at stake than your individual concerns. It all leads to one sobering question: Isn’t there a better way of doing things—a way to ensure our economy doesn’t go completely down the tubes?



Yes, says Nathan Lewis, and the solution is surprisingly simple. Many of our problems—including today’s worsening inflation—stem from the instability of our money. This causes all sorts of difficulties today, which we didn’t have when the dollar was on a gold standard in the 1950s or 1960s.

“Why bring back the gold standard?" asks Lewis, a former Wall Street economist who has advised governments and author of Gold: The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95). “How about: Why bring back stable money? The question answers itself. It might sound too good to be true, but it’s not. Living through a serious inflation or deflation isn’t pleasant, and these two scenarios are precisely what we will continue to experience, over and over again, with our soft money system.

“Under today’s floating currency system, governments and their economic advisers have often reached for currency devaluation to cure apparent problems, because it can bring a brief illusion of economic health," he adds. “It’s happening right now. But inevitably, the inflation fails to solve the problems and instead creates new ones. It took twenty years for the U.S. economy to make even a partial recovery from the inflation of the 1970s, which began when the U.S. left the gold standard in 1971. But, it appears we did not learn our lesson. The lesson was: stick to gold."

Gold has been used as money for literally thousands of years because it remains stable in monetary value. If your currency is pegged to gold, then the currency also will be stable. For centuries—up until 1971—the system worked. Since the economy wasn’t being contorted by inflation and deflation, people were able to gradually improve their situation.

“A gold standard is the opposite of what we have today, which is a situation that allows governments to contort the economy via their control of money. Sometimes it’s on purpose, and sometimes it’s just a result of accident or ignorance," says Lewis. “Today’s system creates a constant series of inflations and deflations that can have devastating effects on foreign exchange markets, wages, the tax system, debt, and the stock market. All of these effects are ultimately harmful. A system of stable money, which in practice has always meant one based on gold, allows the economy to progress unmolested by government bureaucrats and their monetary distortion.

“We often look back on the 1950s and 1960s as a sort of Golden Age for the U.S., when living conditions for the majority of Americans steadily improved," adds Lewis. “It was a Golden Age for a reason. One reason was that the dollar was pegged to gold during those decades. It’s not about ideology; it’s about results. When people ask: ‘What produces the best outcome?’ the answer is obvious. We can enjoy another Golden Age in this country. When people understand how simple this is, they will demand it."

Here are a few reasons why now is a better time than ever to switch back to the gold standard.

Economic life for Americans hasn’t improved from forty years ago. Think about this: In the thirty-six years since the U.S. went off the gold standard, the median household income hasn’t grown in devaluation-adjusted terms. Average weekly wages, in 1965 dollars, are about half of what they were forty years ago. Even the Dow Jones Industrial Average, in inflation-adjusted terms, is about where it was in 1965.

“Look around you," says Lewis. “Yes, we have iPods and cell phones. But is the affordability or quality of housing any better than it was forty years ago? Is education any better? Do people have more free time and better financial security? Are the neighborhoods safer and more enjoyable? Has family life improved? Has medical care become more affordable? For the great majority of people, the answer is no, and any improvement that has come is only via a two-income household or more consumer debt. The statistics say the same thing. In forty years, we’ve gone nowhere—and that’s due, in large part, to the economic cancer of floating currencies. At the same time, the speculators and financial elite, who know how to benefit from currency chaos, keep getting richer. Stable money empowers workers, savers, and businesspeople who provide goods and services."

The world is heading into a period of inflation. If something isn’t done to end government money manipulation, we are probably headed for an inflationary period similar to the one we had in the 1970s. “Inflationary events can be phenomenally destructive," says Lewis. “Creditors lose their shirts. Debtors gain unexpected windfalls. Real wages decline. Pensioners find their monthly payments are inadequate. Taxes rise due to bracket creep and the taxation of illusory capital gains. In every such event, there are a minority of investors who can weather the storm and seize the moment when asset values reach rock bottom. In time, people will realize that our present economic course is unacceptable. They will look to a new solution. The best solution, over the last four hundred years, has always been some form of a gold standard."

People’s fear of a gold standard is completely irrational. We fear that which we do not understand. Or, to offer a slightly different take, we fear that which we’re told to fear. Lewis says that the main academic argument against returning to hard currencies is the idea that macroeconomic management (currency devaluation) is necessary in the event of a 1930s-style breakdown. “We are still living in fear of the 1930s," he points out. “However, the ‘remedy’ doesn’t work and actually creates new problems. I expect that Ben Bernanke, who built his career on untested theories about the Great Depression, is going to learn that the hard way."

The U.S. had a gold standard, with some lapses, from 1789 to 1971. That’s 182 years, during which the U.S. was the most successful country on the planet. At the end of that period, the U.S. had the broadest and most prosperous middle class the world has ever seen. What is there to be afraid of in that? “There’s nothing hypothetical about it," says Lewis. “We ran the experiment, and it worked. Are we going to need 182 years of floating currencies to come to a conclusion? I hope not.

“Currency devaluation has been tried literally hundreds of times since the 1940s as a remedy for all manner of economic ills, and it has failed every single time," he adds. “Floating currencies are what should give people a real fright—along with the results they will have on the middle class if the present situation worsens. We did that experiment, too, and we know the results. For at least two thousand years, governments have been fooling around with floating currencies. And, for at least two thousand years, when people get tired of what happens when you play games with currencies, they go back to the stability of gold."

It would mean low interest rates. “Historically, one of the primary reasons for governments to return to gold-linked hard currencies is that they permit sustained, low interest rates," says Lewis. “We’ve had a few years of relatively low interest rates in the U.S., but they are likely to head higher in the future. Bondholders will demand to get paid for the risk inherent in today’s low-quality, soft currencies. But it hasn’t always been that way. Between 1823 and 1914, ninety-one years on the gold standard, Britain’s government never paid more than 4 percent on its debt. Often it was below 3 percent. These were bonds of infinite maturity. During that time, Britain built an empire that spanned the globe. That one figure tells you all you need to know about monetary and macroeconomic stability. That kind of performance is impossible with today’s floating currencies."

It will build a stronger economic future for all. The next gold standard might not be in the U.S. The governments that understand the benefits of stabilizing their currency with gold will have the leading economies and international currencies of the future. It could be China, or Dubai, or Russia, or Singapore. The dollar became the world’s leading currency because it stuck to gold between 1914 and 1950 while all the European countries floated and devalued. The leading international currencies of twenty or fifty years from now will be those that stick to gold. “An environment of stable currencies worldwide leads to additional benefits," says Lewis. “Governments, no longer able to manipulate their currencies to achieve policy goals, no longer able to blame their central banks for economic stagnation, would be forced to compete on the relative merits of their tax and regulatory structures."

If we make the change deliberately and proactively, perhaps we can avoid a currency crash and all the suffering that comes along with economic disaster. Already, governments including those of Malaysia, Russia, and Panama have expressed interest in gold-linked currency.

“It may take many more years, even decades, but the era of soft money is slowly coming to a close," says Lewis. “The world really has no choice but to move back toward a framework of hard money. The never-ending and completely unnecessary difficulties of floating currencies can be solved in no other way. The potential benefits of a return to hard currencies are enormous, not only for the billion or so people of the developed world, but especially for the five billion people of the developing countries."

# # #

About the Author:

Nathan Lewis was formerly the chief international economist of a leading economic forecasting firm. He now works in asset management. Lewis has written for the Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.

About the Book:

Gold: The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all major online booksellers, and direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.