Jun 22, 2011 – 12:49 PM ET
By Ralph Benko
Professor Robert Mundell urges gold convertibility for the euro, the currency which he fathered, as well as for the dollar. This is a major step forward. Thought leaders are abandoning “old monetarism,” which was vainly fixated on quantity. Even its chief proponent, Milton Friedman, acknowledged old monetarism as unsuccessful in a 2003 interview with the Financial Times. An emerging “new monetarism” is quickly taking its place — one that focuses on the quality, not quantity, of money.
Empirical data suggest that the gold dollar represents the epitome of quality. As Forbes’ own Steve Forbes advised the presidential candidates last week, the “debate should be focused on what the best gold system is, not on whether we need to go back on one.”
Mundell recently endorsed the gold standard on Pimm Fox’s Bloomberg Television “Taking Stock.”
Pimm Fox: You’ve written about the role of gold in the world economy, Professor Mundell. Do you think that we’re going to see any kind of return to the gold standard?
Mundell: [T]here could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.
The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So If you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.
Mundell is the world’s most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, “The Mundell-Laffer Hypothesis,” which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him). Mundell’s guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell’s work also laid the foundation for the common European currency, the euro.
Although Mundell is less of a pop culture celebrity than Paul Krugman, another Nobel winner, the impact of Mundell’s life work is epochal, while Krugman caps his career as a New York Times blogger. I have argued elsewhere that Mundell’s work has helped create something like $100 trillion of new wealth. The world’s GDP in 1980 was around $11 trillion, reports the World Bank. Today it is around $60 trillion. Mundell had much to do with this.
The added $50 trillion-per-year capitalizes to over $100 trillion in new wealth — even when adjusted for inflation. Lower tax rates, free trade and more stable currencies moved something like 2 billion people out of dollar-a-day penury into prosperity. That achievement arguably makes Mundell the greatest living humanitarian. In becoming the first Nobel-class economist to advocate the gold standard it suggests that his greatest contribution to human flourishing may lie ahead.
Let us now take the next step from the 20th century’s “Mundell-Laffer Hypothesis” to a 21st century “Mundell-Tamny Hypothesis.” Tamny, editor of Forbes‘ Opinions page, proposed in his June 12 column that we:
… define the euro in terms of gold, and make euros redeemable in the yellow metal. If so, the euro’s staying power and eventual rise to preeminence among currencies would almost be assured. Strong money that is stable in value is much demanded as a ticket used to exchange real wealth, and if the euro had a stable definition, it would quickly trump the dollar.
Of course the mythmakers predicting the euro’s demise would argue that a gold-defined euro would lead to certain debt default by Greece and Ireland (to name but two struggling countries), and that both would quickly exit the euro under such a scenario. The thinking here is wildly incorrect. ….
[T]he governments of Greece and Ireland are having trouble with their debts to some degree because economic growth has withered alongside tax receipts. If so, far from a weight on growth, a strong, stable euro would attract the investment that would drive company formation and job creation that would bolster the ability of both governments to remain current on interest payments. For good or bad, economic growth is always the best fix for governments in arrears to creditors.
Many economists are already considering restoring the classical gold standard. From the rising economies known as the BRICS, S.S. Tarapore, former deputy governor of the Reserve Bank of India, has publicly articulated the virtues of the gold standard. Zhou Qiren, dean of Peking University’s National School of Development and a member of the People’s Bank of China Monetary Policy Committee recently, while not minimizing the political challenges of doing so, told a reporter Ye Weiqiang:
If the currency of each major country is bound to gold, financial headaches would of course be reduced. Taking QE2 as an example, if this were the 1880s, the currencies of the major western countries would be measured in gold. Unless the U.S.Treasury suddenly gained a large quantity of gold reserves, it would be impossible for (U.S. Federal Reserve Chairman Ben) Bernanke to print US$ 600 billion to purchase long-term debt. If there is a commitment to a gold standard system, such as the Bretton Woods system in place until 1971, the Fed could not easily ease its monetary policy, because not only could each country with dollar holdings hold them accountable, they could also redeem their dollars for gold to see how much Uncle Sam’s promise is worth.
A gold standard also would eliminate exchange rate wars. Since all major currencies could be exchanged for gold or other currencies pegged to a currency that follows the gold standard, exchange rates would remain stable without anyone doing anything. Where would exchange rate disputes come from? In short, the 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.
Of course, this is an excellent monetary system.
This, of course, is but the tip of an iceberg with commentators such as Larry Kudlow pushing gold as the “crown” of an economic growth strategy.
The gold standard is the key to human flourishing. If we grasp the opportunity of gold convertibility this still-dawning millennium beckons with the possibility of becoming a new golden age.
Ralph Benko is associated with American Principles in Action, which supports a return to a gold standard. A version of this piece originally appeared on forbes.com