Time for fed to make return to gold standard

Freedom New Mexico

Families across America are suffering what we’ll call pump shock: A doubling of gas prices in the past two years. A couple days ago, one of us paid $4.27 a gallon, spending about 43 bucks to fill up a Toyota Corolla.

At a Town Hall meeting in Reno last week, President Barack Obama blamed price-gouging by oil companies: “The attorney general’s putting together a team whose job it will be to root out any cases of fraud or manipulation in the oil markets that might affect gas prices — and that includes the role of traders and speculators. We are going to make sure that no one is taking advantage of the American people for their own short-term gain.”

He’s right to link gasoline and oil prices; gas is refined from oil. But he doesn’t see that the real problem is the incipient inflation that has been caused by the federal government. It’s not just oil and gas that are going up in price — although pump shock perhaps is the most visible to consumers — but food and other commodity prices, too.

In first-quarter 2011 compared to the same three months last year, commodity prices rose as follows: corn, 74 percent; wheat, 69 percent; soybeans, 36 percent; beef, 36 percent, according to the World Bank.

Economists give various reasons for inflation. But it seems to us that this is a repeat of the 1970s, when the Federal Reserve Board printed too much money, causing that decade’s “stagflation” (stagnation plus inflation) until it was ended in the early 1980s by Fed Chairman Paul Volcker and President Ronald Reagan.

Current Fed Chairman Ben Bernanke, who was reappointed by Obama, has given us two rounds of what’s now called “quantitative easing,” a euphemism for creating money to goose the economy: QE1 in late 2008 was $1.7 trillion. And QE2, begun in November and continuing for a few more weeks, will total $600 billion.

Total so far: $2.3 trillion. All that money creation has goosed the economy — and inflation.

Some economists, especially those of the Austrian school of economics popularized by Rep. Ron Paul, R-Texas, are calling for a return to the gold standard the country was on from 1789 until 1971. Doing so would require the Fed to maintain the value of the dollar at a fixed value, such as the $35 price for gold from 1934-71.

Although there was no official standard, gold’s price also was fairly stable from 1981-2001 at about $350 an ounce on average. But since 2001, the price has steadily risen, with sharp surges upward in recent weeks. The late economist Jude Wanniski noted that, since World War II, the price for one ounce of gold was roughly equal to the price for 15 barrels of crude oil. Even when prices soar sharply, as in 2008, eventually the ratio is restored. As of April 27, gold was $1,528 per ounce and oil $113.17 per barrel, an oil-to-gold ratio of 13.5 barrels per ounce.

While a return to the gold standard is unlikely to gain much momentum politically, Fed Chairman Bernanke’s indications Wednesday that the Fed’s “quantitative easing” program finally will be completed in June came as welcome news. We’ve criticized the bond-buying program for masking, not curing, economic problems. The U.S. government became the Treasury market’s biggest buyer, thus creating, as the Wall Street Journal noted Tuesday, a “profit illusion” for investors who believe they can make money off rising prices and falling yields.

It’s time for the “real economy” of the private sector to manage on its own, and for the government to focus on reducing its debt, controlling spending and follow policies that keep inflation in check. With a new air of certainty, entrepreneurs and everyone, really, will be motivated to save and invest.