This article was published by Forbes.com on May 21, 2012
Herman Cain’s greatest contribution to the Republican primaries was his call for policies that would lead to economic growth by increasing the economic freedom of the American people. He rose to the top of the polls by matching that rhetoric with his bold plan to replace the current corrupt and inefficient tax system with his now famous 9-9-9 tax reform plan.
Now, in his new book: 9-9-9 An Army of Davids,Cain, along with his Senior Economic Advisor and co-author, Rich Lowrie go beyond 9-9-9 and provide a compelling case and full elaboration on his bold plan to restore economic growth by reforming the tax system, the regulatory state, and the monetary system. The combination of these reforms, in the words of the authors, would “fundamentally transform Washington.”
The case for 9-9-9 and regulatory reform are fairly well known. Where Cain breaks new ground is his call for a “21st Century Gold Standard.” Just as important, he offers a concrete, step-by-step path to make the dollar once again as good as gold, and a new set of operating procedures for the Federal Reserve that would avoid the errors of the past.
The timing of Cain’s book is propitious. Rep. Kevin Brady (R-TX) and Sen. Mike Lee (R-UT) have each introduced bills in their respective chambers that would take the first steps toward restoring a sound dollar. By showing that an orderly return to a gold standard is possible, Cain joins Lewis Lehrman, noted financier, monetary authority, and author of The True Gold Standard, in debunking those who claim there is no escape from the paper dollar status quo.
Cain brings to the case for monetary reform his experience as the Chairman of the Federal Reserve Bank of Kansas City, and the work of a team of economic advisors that supported his campaign co-chaired by Mr. Lowrie, this columnist, Brian Domitrovic and Paul Hoffmeister.
In one of the most entertaining parts of the book, the authors capture the craziness of the current floating, paper dollar by asking the reader to imagine what the world would be like if the government could change daily the number of minutes in an hour. Life would be chaotic. But soon, the private sector would create an entire “chaos industry” to help us cope with the uncertainty of time, just as we now must cope with the uncertainty of the value of the paper dollar. Before you know it, established media and intellectuals would be “singing the praises of a floating hour and opine on the downright restrictive nature of the old barbaric system” under which people would be expected to arrive to meetings on time!
In a more serious vain, the benefits of a dollar as good as gold are reported: Higher economic growth, lower unemployment, stable prices, rising real wages and living standards, a less cyclical economy, and virtually no financial crises. The myths used by the defenders of the paper dollar also are dispelled, most importantly including the charges that the gold standard “caused” the Great Depression, that it would restrict the ability of the economy to grow, and empower Wall Street and financiers to the disadvantage of Main Street and American families.
The historical evidence is clear: the paper dollar that we have lived under since 1971 has underperformed the gold standard on every important economic variable, and must treated for what it is, an experiment that has completely failed to increase employment and minimize recessions by giving twelve men and women on the Federal Reserve’s Open Market Committee the power to manipulate the value of our money and interest rates.
Six principles are offered to guide the transition to the 21st Century Gold Standard:
1) Overall prices should remain near today’s levels, including no forced reduction in wages.
2) The process for establishing the new link between the dollar and gold must be transparent, making use of markets to establish the value of the dollar in terms of gold.
3) The transition must be gradual, but the path must be clear. This will permit as smooth an adjustment process as possible.
4) The Fed will be given new operating procedures to ensure that under the new gold standard, it will guarantee the value of the dollar and will not restrict the number of dollars available for the economy to grow.
5) Individuals must have the right to exchange currency and deposits at the Fed for gold at a fixed price and, conversely, exchange gold coins and bullion for dollars at the same price.
6) The United States should lead the effort to create a new 21st Century International Gold Standard.
The transition would begin with an announcement that on a date certain, say six months out, the President would instruct the Secretary of the Treasury to coordinate with the Federal Reserve to begin to stabilize the value of the dollar in terms of gold to a band of plus or minus 20%. Interest on bank reserves now paid by the Fed would be phased out. And, legislation would be introduced that would in four steps over a period of thirty months gradually reduce the bands of the dollar’s rate of exchange into gold until full convertibility of the dollar into a weight certain of gold is established.
New operating procedures would give the Fed a single target – the value of the dollar in terms of gold – and the tools to achieve that target. Open market operations would be used for the sole purpose of increasing or decreasing the supply of dollars in order to maintain the dollar/gold exchange rate. Other than setting the Discount Rate to fulfill its role as lender of last resort, targeting or manipulating interest rates would be prohibited.
In addition, the U.S. would mint gold coins of a fixed weight and purity, which would be legal tender and circulate as money. For the most part, people would continue to use currency, checking accounts and charge cards as they do today. However, they would have the additional right to exchange currency or deposits at the Fed for gold, and gold for currency or deposits – at the same, fixed rate of exchange.
Finally, the Fed would be prohibited from sterilizing gold inflows or outflows. Instead, over time, it would be required to conduct open market operations to maintain the 237 million ounces owned by the government. This provision would keep the Fed from repeating the mistake which in 1971 forced the United States to abandon the last vestiges of the gold standard: viewing an outflow of gold as a symptom of a shortage of gold instead of a surplus of dollars. It would also keep the Fed from artificially restricting the supply of money out of misguided fears of strong economic growth and low unemployment, or otherwise attempt to do what it has proven it is incapable of doing, managing the economy by printing money, manipulating the value of the currency, or setting interest rates artificially low, or high.
Chaos and complexity are replaced by a well-ordered monetary system where, in the words of Herman Cain, a dollar is a dollar, just like an hour is an hour.