Lewis E Lehrman
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The Nixon Shock Heard 'Round the World
August 15, 2011 - The Wall Street Journal

On the afternoon of Friday, Aug. 13, 1971, high-ranking White House and Treasury Department officials gathered secretly in President Richard Nixon's lodge at Camp David. Treasury Secretary John Connally, on the job for just seven months, was seated to Nixon's right. During that momentous afternoon, however, newcomer Connally was front and center, put there by a solicitous president. Nixon, gossiped his staff, was smitten by the big, self-confident Texan whom the president had charged with bringing order into his administration's bumbling economic policies.

In the past, Nixon had expressed economic views that tended toward "conservative" platitudes about free enterprise and free markets. But the president loved histrionic gestures that grabbed the public's attention. He and Connally were determined to present a comprehensive package of dramatic measures to deal with the nation's huge balance of payments deficit, its anemic economic growth, and inflation.

Dramatic indeed: They decided to break up the postwar Bretton Woods monetary system, to devalue the dollar, to raise tariffs, and to impose the first peacetime wage and price controls in American history. And they were going to do it on the weekend—heralding this astonishing news with a Nixon speech before the markets opened on Monday.

The cast of characters gathered at Camp David was impressive. It included future Treasury Secretary George Shultz, then director of the Office of Management and Budget, and future Federal Reserve Chairman Paul Volcker, then undersecretary for monetary affairs at Treasury. At the meeting that afternoon Nixon reminded everyone of the importance of secrecy. They were forbidden even to tell their wives where they were. Then Nixon let Connally take over the meeting.

The most dramatic Connally initiative was to "close the gold window," whereby foreign nations had been able to exchange U.S. dollars for U.S. gold—an exchange guaranteed under the monetary system set up under American leadership at Bretton Woods, N.H., in July 1944. Recently the markets had panicked. Great Britain had tried to redeem $3 billion for American gold. So large were the official dollar debts in the hands of foreign authorities that America's gold stock would be insufficient to meet the swelling official demand for American gold at the convertibility price of $35 per ounce.

On Thursday, Connally had rushed to Washington from a Texas vacation. He and Nixon hurriedly decided to act unilaterally, not only to suspend convertibility of the dollar to gold, but also to impose wage and price controls. Nixon's speechwriter William Safire attended the conference in order to prepare the president's speech to the nation. In his book "Before the Fall," Safire recalled being told on the way to Camp David that closing the gold window was a possibility. Despite the many international ramifications of what the administration would do, no officials from the State Department or the National Security Council were invited to Camp David.

The president had little patience or understanding of the disputes among his economic team members. He found wearisome the mumbo-jumbo from Federal Reserve Chairman Arthur Burns. But the president had determined he would have a unified economic team and a unified economic policy, no matter what the consequences. So the White House dutifully leaked stories designed to undermine and humiliate Burns, as Connally waited in the wings with his "New Economic Policy."

At Camp David, Connally argued: "It's clear that we have to move in the international field, to close the gold window, not change the price of gold, and encourage the dollar to float." Burns timidly objected but was easily flattered by the president. By the evening of Aug. 15, Burns was on board with terminating the last vestige of dollar convertibility to gold, depreciating the dollar on the foreign exchanges, imposing higher tariffs, and ultimately ordering price and wage controls.

Nixon and Safire put together a speech to be televised Sunday night. It had taken only a few hours during that August 1971 weekend for Nixon to decide to sever the nation's last tenuous link to the historic American gold standard, a monetary standard that had been the constitutional bedrock (Article I, Sections 8 and 10) of the American dollar and of America's economic prosperity for much of the previous two centuries.

At least one Camp David participant, Paul Volcker, regretted what transpired that weekend. The "Nixon Shock" was followed by a decade of one of the worst inflations of American history and the most stagnant economy since the Great Depression. The price of gold rose to $800 from $35.

The purchasing power of a dollar saved in 1971 under Nixon has today fallen to 18 pennies (see the nearby graph). Nixon's new economic policy sowed chaos for a decade. The nation and the world reaped the whirlwind.

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Bretton Woods and Bad Days for Dollars
August 15, 2011

First July 1944 and then August 1971: the dog days of summer have been momentous for the American dollar. It was 67 years ago that 44 nations from around the world gathered at Bretton Woods, New Hampshire, to plan the post-war framework for international money and trade.

Bretton Woods had been chosen by Harry Dexter White, the chief international economist at the Treasury Department and the chief American negotiator. White himself had a summer home in FitzWilliam in southwest New Hampshire, but White had been influenced by the frail chief British negotiator, John Maynard Keynes, who strongly objected to the torture of hot, humid Washington.

White and Lord Keynes had worked out the post-war monetary framework over the previous two years. The Bretton Woods accord was designed by Keynes, an Englishman, and White, an American sympathetic to Keynesian economics. Both wanted the post-World War II world to improve the post-World War I disasters. They would try to take into account the past deficiencies of the international monetary system of the 1930s but they managed to perpetuate the instabilities of the dollar-centric global financial system.

Of the two architects of the Bretton Woods agreements, Keynes was by far the better known, having published “The General Theory of Employment, Interest and Money” in 1936. But at Bretton Woods, with American power and the Roosevelt administration behind him, White was the more influential. Keynes, now an opponent of the classical gold standard, agreed to a system where the currencies of other nations were pegged to the dollar and the dollar was pegged to gold. But nations could demand gold for dollars to settle the U.S. balance of payments deficits. The U.S. dollar in effect had displaced gold, becoming the world's reserve currency.

The Bretton Woods system stumbled along, monetary crisis after crisis, for 27 years until the summer of 1971 when Britain demanded that the United States redeem three billion dollars for gold. President Richard Nixon and Treasury Secretary John Connally had been preparing for such an eventuality.   Connally abandoned the heat of his native Texas to rush back to Washington to meet with Nixon at the White House. Together, they decided to act swiftly and convene a meeting the next day at Camp David.

Confronting the nation's top economic officials, but none of its top foreign policy leaders, Connally pushed through a domestic and international economic program intended to deal with deteriorating trade, employment and inflation. The keystone was “closing the gold window” by which other nations would no longer be able to redeem dollars for gold. In contrast to the planning of the three-week Bretton Woods meeting, the Nixon officials met on a Friday, reached consensus by nightfall, and prepared to announce the new policy by Sunday.

On the evening of August 15 President Nixon went on TV to outline his policies and denounce “speculators [who] have been waging an all-out war on the American dollar.”  Nixon went on to say: — “I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”  This was the “Nixon Shock” to the American and world economic system, followed by the first peacetime wage and price controls of American history, followed by the worst economic decade since the great depression.

What America Can Learn from the Greece Financial Crisis
June 30, 2011

Observations on the Greece financial crisis and what America can learn:

  1. Greece is only one example of an irresponsible, reckless, insolvent government, which is spending itself into bankruptcy. There are dozens of such countries, both developed and emerging.
  2. Central bank and commercial bank credit financing of the government budget deficits in every country leads to inflation. This mechanism leading to inflation is subtle but pervasive and inevitable.
  3. The solution to the problem is to prevent governments from requiring their central banks and commercial banks from creating new money and credit to finance government spending.
  4. In the case of America, the budget deficit and the balance of payment deficit affect the entire world because the world is on the paper dollar standard. The dollar is the official reserve currency of the world. These US deficits are financed by the Fed, the commercial banks, and foreign central banks with new money and credit which cause the depreciation of the dollar. The vast new Fed created credit of QE1 and QE2 floods the world banking system with excess dollars, causing world wide inflation.
  5. Greece is the concrete lesson for American public finance. Central bank and commercial bank financing of the government budget must be restricted or, even better, prohibited.
  6. The best institutional restriction on undisciplined Federal Reserve discretion to finance the budget and balance of payments deficit is to establish convertibility of the dollar by statute to a fixed weight of gold and to end the official reserve currency role of the dollar.
  7. When the dollar is convertible at a fixed parity to gold, then if the Fed and the banks create too much money and credit, causing inflation, the American people can protect themselves by turning in their undesired dollars for gold at the fixed parity. Since the Federal Reserve and the banks would be required by law to redeem the dollars in gold, the banks must then reduce the expansion of credit, tending to reduce inflation.

The gold standard, in a word, is democratic money. The sovereign American people should regulate the quantity of money and credit, not the Federal Reserve, a government agency. Gold is also the money of the Constitution as stipulated in Article I, Sections 8 and 10. Thus, the monetary system must be regulated by a democratic people, and not by economists manipulating the currency at the Federal Reserve Board and the Treasury.

It's Not the Debt Ceiling — It's the Dollar
June 9, 2011

The missing issue of this Presidential election is monetary policy — America's need for a stable dollar. But massive Federal Reserve credit expansion, QE1 and QE2, has forced the volatile dollar down to such a depreciated level on the foreign exchanges that, absent QE3, a reversal of trend should appear with rising interest rates by the upcoming Presidential election.

Even more confusion pervades the public controversy over the future of the world dollar standard and its alternative — the true gold standard. The international debate focuses on the longevity of the dollar as the world's official reserve currency. The debate stems from two, recent, contradictory events. On the one hand, an unstable dollar, caused by the Federal Reserve credit contraction of 2005-2007, led to the deflation of 2007-2009. On the other hand, the steady rise of the gold price — also caused by the subsequent Fed expansion of QE1 and QE2 — has signaled the threat of inflation. The painful economic consequences of alternating deflation and inflation have refocused the historic American monetary debate. Americans must choose between paper money and gold. The choice will be either: (1) floating paper currencies mixed with pegged exchange rates for key currencies — such as a fixed link between the paper dollar and the paper Euro; or (2) on the other hand, a non-national, neutral American monetary standard such as gold, i.e. a dollar defined in statute by a stable, fixed weight of gold.

To choose the gold standard and a stable dollar entails an American self-denying ordinance by which to reject the privilege and the burden of the official reserve currency role of the dollar. To choose floating paper currencies with a pegged dollar-Euro exchange means continued systemic inflation and deflation, caused by unconstrained Federal Reserve and foreign central bank manipulation of the official dollar reserve system.

Dollar instability has engendered a near-universal loss of confidence in the world dollar standard. But there is no equally liquid currency alternative for national reserves. Two generations of collapsing pegged exchange rates and unhinged floating currencies have turned trust in official dollar reserves into mistrust and contempt, not least because dollar volatility and near-zero interest rates primarily benefit the subsidized bankers and Wall Street speculators. It is their lobby that welcomes near zero interest rates and the profit-making volatility of speculative markets — the very same volatility that deranges sound, long-term business planning and destroys the savings of working families.

A world standard of monetary measurement that is extremely unstable is no trustworthy standard at all. Take an example from uniform weights and measures, such as the yardstick, which is defined everywhere as 36". All contracts made according to such a standard of measure are based on the agreed definition of the yardstick and thus rely on the stability of the standard. No government agency, no person, has the authority to manipulate the yardstick and to manage it toward 33" tomorrow, 39" next year. The economic consequences of such arbitrary volatility would be enough to deconstruct all industries that depend on a stable standard of measure. Floating exchange rates are like floating yardsticks. Floating exchange rates abruptly distort entire national economies, radically repricing in world trade the value of national labor and national factors of production, thereby forestalling investment and inducing intermittent inflation and deflation — boom, panic, recession, and unemployment.

Given the instability of the dollar, the once-trusted measuring rod of value in world trade, a single question should dominate the present monetary debates: Does a dollar convertible to gold at a fixed price, i.e., a dollar defined in law as a weight unit of gold, rule out systemic inflation and deflation better than the Fed manipulated, inconvertible paper and credit-based dollar of today? The answer to this question, given the historical evidence, is yes. (See Table I and discussion below.) Can any proposed further pegging of key currencies produce anything but more pegged currency financial crises of the kind we have experienced in the past? These crises include the 1971 collapse of the Bretton Woods dollar exchange rates pegged to European currencies, followed by a decade of stagflation; the collapse of pegged European currency exchange rates before the onset of the Euro in 1999; the near total collapse in 1996-2000 of pegged dollar exchange rates in Asia, along with the collapse of the Asian economies and other emerging economies. Moreover, the pegged undervalued Chinese-American exchange rate has helped to deindustrialize America and to encourage mercantilism — generating inflation in both countries. These are but four profound examples of the consequences of floating and pegged currency exchange rates that still orbit unpredictably around the unstable world dollar standard.

Ultimately, America will choose either dollar convertibility to gold at a fixed price, or continue with the Fed run paper-credit dollar that has lost 80% of its purchasing power since 1970 (see Graph I).

The Dollar Deflated

Graph I: The Dollar Deflated by the CPI. See Testimony, Lewis E. Lehrman, March 17, 2011 before Congress.

On the basis of experience and evidence, Americans should make this choice. Reviewing the history of American monetary standards since the Coinage Act of 1792, an act which established the gold and silver monetary standards at the Founding of America, the evidence suggests that the classical gold standard is the least imperfect American monetary standard of our history (see Table I).

See John D. Mueller, Redeeming Economics

Table I: See John D. Mueller, Redeeming Economics (ISI Books, 2010)

In a word, over the long run the gold standard produces the most stable dollar. This stability was the key to long-term savings and long-term investment, which underwrote the unprecedented industrial revolution and economic growth in America of the 19th century.

Of course, no monetary system can be flawless in the world of human affairs. But empirical evidence of two hundred years of American monetary history shows that the true (or classical) gold standard has the least imperfect record as a stable monetary standard, because the dollar convertible to gold acted as the stable gyroscope of rapid economic growth.

Neither the unstable, pegged exchange rate system of the 1920s, based on sterling and the dollar; nor the crisis prone, dollar-based, post-World War II Bretton Woods pegged-exchange rate system; nor especially the volatile floating-pegged dollar system of the past forty years — none of these floating and pegged exchange rate arrangements measure up, by empirical stability tests, to the classical gold standard period of American history (as Table I shows). Both American and modern history also suggest that monetary systems based on mutually convertible currencies to gold produce the most stable international price level over the long run. This is so because the classical gold standard requires prompt adjustment and settlement of deficits and debt. Indeed, the institutional discipline of gold convertibility, without reserve currencies, limits inflationary U.S. current account deficits and endless federal deficit spending — both financed by the Federal Reserve and foreign central banks which monetize the flood of dollars arising from these twin deficits.

My colleague, John Mueller, and I have often recommended Table I as some of the evidence for the superior stability of the gold dollar. The data show that the stability of the U.S. dollar has varied widely in its history. This variation is explained by two factors: (1) the monetary standard chosen for the dollar, and (2) whether other countries have simultaneously monetized the dollar, embracing therefore the world dollar standard, and used securities payable in dollars, as their official reserves — the essence of the official reserve currency system of today.

The United States has alternated between two kinds of standard money: inconvertible paper money and some precious metal (silver and gold). The dollar was an inconvertible paper money during and after the Revolutionary War (1776-92), the War of 1812 (1812-17), the Civil War (1862-79), and again from 1971 to the present. In 1792-1812 and 1817-34, the gold eagle was standard money, but the dollar in circulation was a weight of silver. The circulating dollar was a defined weight of gold in 1834-61 and 1879-1971. The dollar was not used by foreign monetary authorities as an official monetary reserve asset before 1913, but the dollar has been an official "reserve currency" for many countries since World War I, and for most countries since 1944, especially since the end of Bretton Woods in 1971.

Applying these two criteria divides the monetary history of the United States into distinct phases. We can compare the stability of these monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two simple measures: long-term CPI stability (measured by the annual average change from beginning to end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period). Weighting these criteria equally, the classical gold standard from 1879-1914 was the most stable of all U.S. monetary regimes (Table I).

As Table I suggests, the fundamental purpose of the true gold standard was to establish a stable dollar over the long run, as it did for almost a century before 1914. Indeed, under the classical gold standard, the American general price level rested at almost the exact same point in 1913 as it did in 1879 — despite the enormous economic growth of the industrial revolution during this period. Compare this record with the 80% paper dollar depreciation, during a similar length of years (Graph I).

The fundamental monetary issue of our time is not only whether the gold price is rising or falling, nor whether the dollar is falling or rising, nor even that the Fed produces both inflations and deflations. Instead, the key political and economic problem is the world financial disorder of the dollar, giving rise globally to manias, panic and bust, deflation and inflation — even unemployment mixed with Fed created financial booms.

What are the institutional monetary arrangements by which to mitigate this dollar disorder and to establish a reasonably stable American monetary standard? It is no mitigation to forecast, as some do, above consensus economic growth in 2011 and 2012; for as in the past, it will be but a brief period of euphoria for all but the unemployed. The question remains, how does America establish a stable dollar for the long run?

The empirical data of Table I recommends the classical gold standard, the least imperfect American monetary standard of American history.

Monetary Reform: The Key to Spending Restraint
April 26, 2011 - The Wall Street Journal

Paul Ryan's plan won't succeed without legislation to prevent the Federal Reserve from monetizing the national debt.

No man in America is a match for House Budget Committee Chairman Paul Ryan on the federal budget. No congressman in my lifetime has been more determined to cut government spending. No one is better informed for the task he has set himself. Nor has anyone developed a more comprehensive plan to reduce, and ultimately eliminate, the federal budget deficit than the House Budget Resolution submitted by Mr. Ryan on April 5.

But experience and the operations of the Federal Reserve system compel me to predict that Mr. Ryan's heroic efforts to balance the budget by 2015 without raising taxes will not end in success—even with a Republican majority in both Houses and a Republican president in 2012.

Why? Because the House Budget Resolution fails to reform the Federal Reserve system that supplies the new money and credit to finance both the budget deficit and the balance-of-payments deficit. So long as the Treasury deficit can be financed with discretionary money and credit—newly created by the Federal Reserve, by the banking system, and by foreign central banks—the federal budget deficit will persist.

It is true that federal deficits will rise more or less with the business cycle, leading previous deficit hawks such as Sens. Phil Gramm and Warren Rudman to believe that if we just reined in federal spending and increased economic growth we'd have a balanced budget. Indeed, for two generations, fiscal conservatives and Democratic and Republican presidents alike have pledged to balance the budget and bring an end to ever-rising government spending.

They, too, were informed, determined and sincere leaders. But they did not succeed because of institutional defects in the monetary system that have never been remedied.

President Reagan was aware of the need to reform the monetary system in the 1980s, but circumstances and time permitted only tax-rate reform, deregulation efforts, and rebuilding a strong defense. And so the monetary problem remains.

The problem is simple. Because of the official reserve currency status of the dollar, combined with discretionary new Federal Reserve and foreign central bank credit, the federal government is always able to finance the Treasury deficit, even though net national savings are insufficient for the purpose.

What persistent debtor could resist permanent credit financing? For a government, an individual or an enterprise, "a deficit without tears" leads to the corrupt euphoria of limitless spending. For example, with new credit, the Fed will have bought $600 billion of U.S. Treasurys between November 2010 and June 2011, a rate of purchase that approximates the annualized budget deficit. Commodity, equity and emerging-market inflation are only a few of the volatile consequences of this Fed credit policy.

The solution to the problem is equally simple. First, in order to limit Fed discretion, the dollar must be made convertible to a weight unit of gold by congressional statute—at a price that preserves the level of nominal wages in order to avoid the threat of deflation. Second, the government must at the same time be prohibited from financing its deficit at the Fed or in the banks—both at home or abroad. Third, only in the free market for true savings—undisguised by inflationary new Federal Reserve money and banking system credit—will interest rates signal to voters the consequences of growing federal government deficits.

Unrestricted convertibility of the dollar to gold at the statutory price restricts Federal Reserve creation of excess dollars and the inflation caused by Fed financing of the deficit. This is so because excess dollars in the financial markets, at home or abroad, would lead to redemption of the undesired dollars into gold at the statutory parity price, thus requiring the Fed to reduce the expansion of credit in order to preserve the lawful convertibility parity of the dollar-gold relationship, thereby reducing the threat of inflation.

This monetary reform would provide an indispensable restraint, not only on the Federal Reserve, but also on the global banking system—based as the system now is on the dollar standard and foreign official dollar reserves. Establishing dollar convertibility to a weight unit of gold, and ending the dollar's reserve currency role, constitute the dual institutional mechanisms by which sustained, systemic inflation is ruled out of the integrated world trading system. It would also prevent access to unlimited Fed credit by which to finance ever-growing government.

By adding these monetary reforms to his House Budget Resolution, Mr. Ryan has a chance to succeed where previous deficit hawks have failed. As today's stalwart of a balanced budget, he must now become a monetary-reform statesman if he is to attain his admirable goal of balancing the federal budget by 2015 without raising taxes.

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To end the Age of Financial Disorder, Forward to a Modernized Gold Standard
March 29, 2011 - Grant's Spring Conference, Plaza Hotel, New York

Between 2009 and 2010 we have experienced a major, emerging market equity and economic boom — but at the very same time, sluggish growth in the United States. Foreign authorities are now reacting to inflation, raising interest rates, just as relative growth shifts to the U. S. I believe we will witness during this year, a Fed-fueled economic expansion, above consensus, in the United States.

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Fiat Money, Fiat Inflation
March 16, 2011 - The Weekly Standard

Since the beginning of 2009, oil prices have almost tripled, gasoline prices are up about 50 percent, and basic food prices, such as corn, soybeans, and wheat, have almost doubled around the world. Cotton and copper prices have reached all time highs; major rises in sugar, spice, and wheat prices have been creating food riots in poor countries, where basic goods inflation is rampant. That inflation is in part financed by the flood abroad of excess dollars created over the last couple of years by the Federal Reserve.

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Jacques Rueff, the Age of Inflation, and the True Gold Standard
November 7, 1996 - Address at the Parliament of France

Distinguished Leaders of France:

In what I now say to you, I draw from the speeches, the writings, and the letters of the greatest economist of the twentieth century. Your courtesy may require you to hear politely the words I now speak. But I beg you to believe me, that all the arguments I shall make in your presence are distilled from the wisdom of the master himself. The ideas I set before you originate in the proven genius of an extraordinary teacher, a selfless servant of the French people, and a peerless citizen of the world — in the words of General de Gaulle — “une poète de finance.”


I speak of Jacques Rueff.

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Whither Gold
September 15, 1989 - Morgan Stanley

This short research note discusses the forecast of gold in an investment portfolio including the relative under- or overvaluation of gold and U.S. equities.

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Gold in a Global Multi-Asset Portfolio
March 4, 1988 - Morgan Stanley

Since gold is uncorrelated, rather than negatively correlated, with financial assets, it is not surprising that the addition of gold to a financial portfolio can have very different effects. This Investment Research Strategy paper discusses these effects.

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To Move Forward, Go Back to Gold
February 9, 1986 - The New York Times

The damage inflicted on our workers and industries by the overvalued dollar has demonstrated that free trade without stable exchange rates is a fantasy. The argument for gold as a stable currency has rarely been stronger than it is today.

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