Wednesday summary: Hanke on a gold-based currency board; The WSJ challenges the European economic debate; Hubbard says taxes will increase on all taxpayers.

From Globe Asia, Steve Hanke advocates creating a gold-based currency board.

The WSJ debunks the Keynesian debate between European austerity and fiscal stimulus.

On C-CPAN, Steve Forbes discusses the dollar and taxes:



In The WSJ, Glenn Hubbard argues the President’s spending plans will require tax increases on all taxpayers.

At Bloomberg, David Rocks links the euro’s surprising strength to the weak dollar.

From Forbes, Allstate’s Tom Wilson argues the Fed needs a single mandate requiring price stability.

On The Kudlow Report, Frederic Mishkin doubts Fed monetary creation will lead to increased inflation:



At Bloomberg, Francis Wilkinson critiques Art Laffer and Stephen Moore’s Rich States, Poor States.

Tuesday items: Kadlec on Romer's tax findings; Benko on Laffer/Moore's new book; Tamny on unfairness.

From Forbes, Charles Kadlec highlights Obama economist Christina Romer’s scholarly writing on the negative impact of tax increases.

The WSJ notes a rising threat to Europe’s borderless trade policy.

In Forbes, Ralph Benko profiles Art Laffer and Stephen Moore’s Rich States, Poor States.

At The WSJ, Paul Gigot and Dan Henninger discuss the Netherland’s proposed tax increases and declining growth:



At RCM, John Tamny explains that economic fairness makes everyone poorer.

From Alhambra Partners, Joe Calhoun remains moderately bearish on the world economy.

At Forbes, Grove City Prof. Mark Hendrickson highlights the Obama Administration’s interest in a global corporate tax (h/t: Future of Capitalism).

In Barrons, Stanford's John Taylor critiques Keynesian tax stimulus and advocates rules-based monetary policy.

At TGSN, Ralph Benko argues gold offers the best rule for monetary stability.

In The WSJ, Stephen Moore reports Republicans may not win retiring Sen. Kent Conrad’s (ND) seat.

On The Kudlow Report, Tamar Jacoby debates Arizona’s immigration policy:



In The NYT Magazine, Paul Krugman urges Fed Chairman Bernanke to increase inflation.

At The WSJ, Peter Diamond and Emmanuel Saez argue higher top tax rates will generate more federal revenue and not harm growth.

USA Today dredges up hoary misconceptions about the gold standard.

Bernanke gold responses.

The Federal Reserve features Ben Bernanke’s recent anti-gold standard speech:



Select responses:
Ralph Benko (1)
Benko (2)
Benko (3)
Benko (4)
John Tamny
Nathan Lewis
Rich Danker
Douglas French
George Selgin
Jacob Hornberger
Mike Shedlock
James Pethokoukis
Victor Sperandeo

Tuesday round up: Klein compares Obama and Romney tax plans; Kudlow and Forbes on the President's budget; Melloan on the gold standard.

In The Washington Post, Ezra Klein compares tax rates under Obama vs. Romney. One smart observer writes, “Obama got to the right of Romney for the first 60 percent of income levels. Brilliant. And again shows how Romney's timidity and weakness on taxes is provocative.”



The Daily Beast reports anti-tax advocate Grover Norquist arguing that Mitt Romney is acceptable because he will sign conservative legislation.

In Forbes, Ralph Benko likens US Rep. Ron Paul (TX) to Thomas Jefferson.

From First Trust, Brian Wesbury argues the economic recovery is real.

At NRO, Larry Kudlow highlights the many tax increases in the President’s budget proposal.

On The Kudlow Report, Steve Forbes discusses the President’s tax plan:



In The American Spectator, George Melloan advocates the gold standard.

At United Liberty, Jeremy Kolassa assesses CPAC’s gold standard panel.

In The Economist, a confused columnist suggests gold is too volatile to serve as a monetary standard.

The NYT quizzically reports the rise of interest in gold-linked currency.

From US Rep. Walter Jones (NC), a chart on assets held by the US Federal Reserve:

At Salon, David Wolman cites Benn Steil making Robert Mundell’s case for a single world currency.

At RCM, John Tamny explains that on housing, the prudent bailout out the imprudent.

The WSJ roots Greece’s problems in its failure to go for economic growth.

On Kudlow, US Rep. Paul Ryan (WI) offers the Republican alternative to the President’s budget:




From Politico, Scott Paul of the Alliance for American Manufacturing calls for tough action to force China to appreciate its currency (as the US did to Japan in the late 1980s, resulting in long-term deflation and stagnation).

In The NYT, Bruce Bartlett analyzes income’s definition in tax policy.

Monday items: Gold enthusiasm at CPAC; Kudlow on King Dollar; Forbes on the Fed.

From Forbes, Stephen Richer notes youth enthusiasm at CPAC for gold.

TNR reports from CPAC on Herman Cain’s policy focus on tax reform and gold-linked money.

At NRO, Larry Kudlow advocates for a golden King Dollar.

On The Kudlow Report, Stephen Moore debates the President’s tax proposal:



In The WSJ, Art Laffer highlights tax cutting in the states.

At The American, James Pethokoukis critiques the President’s budget proposal.

From Forbes, Steve Forbes bashes Ben Bernanke’s intrusions in the market.

On RCM, Dan Mitchell reports US pressure on Switzerland’s tax haven status.

At The WSJ, Paul Gigot discusses Mitt Romney’s CPAC straw poll victory.



From Forbes, John Tamny rebuts demographic doomsayers.

Wednesday summary: Domitrovic on the Gold Commission; Romney discusses the flat tax and gold standard; Pethokoukis on tax fairness.

From Forbes, Brian Domitrovic provides the history behind Newt Gingrich’s Gold Commission.

The WSJ uses Mitt Romney’s tax return to argue for fundamental tax reform.

On NRO, Larry Kudlow reports Romney believes the President’s class warfare strategy is designed with him (Romney) in mind.

From Forbes, Steve Forbes advises Mitt Romney to come out with a strong pro-growth, pro-capitalism message.

On The Kudlow Report, Romney critiques Gingrich’s flat tax plan and suggests, oddly, that Congress could manipulate the dollar’s exchange rate under the gold standard:



At The American, James Pethokoukis responds to the President on tax fairness.

From PJ Media, David Goldman argues the true unemployment rate, about 1 in 4, guarantees a single term for President Obama.

At RCM, John Tamny suggests hedge fund success implies stock market weakness.

On Peter Schiff’s radio show, Steve Forbes critiques Romney on the China currency debate:




IBD explains Dodd-Frank’s highly negative effect on small and community banks.

CNSNews notes commodity price increases under President Obama.

At Barron’s, Pimco’s Bill Gross suggests the economy is pulled between deflationary and inflationary forces:




From The Hoover Institution, Richard Epstein critiques Massachusetts Senate candidate Elizabeth Warren’s economic proposals.

The NYT highlights the President’s tough talk on China.

Tuesday round up: Benko, Kadlec, and The NY Sun on Gingrich and gold; Mitchell on Romney's tax response; Moore and Pethokoukis on the SOTU.

From Forbes, Ralph Benko and Charles Kadlec link Newt Gingrich’s embrace of a gold dollar to his rising popularity.

The NY Sun notes the monetary affinity growing between Gingrich and Ron Paul.

At International Liberty, Dan Mitchell criticizes Mitt Romney’s debate response on his tax rate.

On The Kudlow Report, Stephen Moore and James Pethokoukis discuss the State of the Union address:



At Alhambra Partners, Joe Calhoun argues the world’s economic problems call for skepticism.

From First Trust, Brian Wesbury suggests the economy is strong.

At Reason, Peter Suderman notes that the expansion of food stamps began under President Bush.

In The NYT, Bruce Bartlett discusses the fundamentals of tax reform.
---------------------

*Today, two additional items below.

Why didn't the Bush tax cuts work?

A frequently asked question is if tax cuts are so economically positive, why did the economy collapse following the Bush tax cuts? Here's my view of the proper supply-side answer:

1) The 2001 Bush tax cuts were largely consumption-oriented rebates and credits that did little to incentivize new economic production.

2) The 2003 tax cuts were on the supply side, meaning oriented towards lowering the penalty on additional work and investment, and they did improve the economy. Growth accelerated from 2003-2007, unemployment fell rapidly, and despite high federal spending the budget deficit shrank as a percentage of GDP.

3) Unfortunately, at the same time US monetary authorities were pursuing a weak dollar policy which encouraged investors to shunt capital into hedges like gold, oil and real estate. The effect was: A) reduced investment in the productive economy; and B) soaring prices in commodities and real estate, the latter of which became a bubble that burst in summer 2007.

4) As supply-side eminence grise Robert Mundell has explained repeatedly, almost a year after the apex of the mortgage crisis, Ben Bernanke's Federal Reserve compounded the damage by suddenly tightening* money, causing the dollar to soar 30% in three months, the largest such appreciation in such a short time in peacetime history. Tight money sent the over-leveraged economy into a liquidity crunch, crashed the financial system, and broke the economy's back.

5) Since then, the dollar has see-sawed back and forth by wide margins, creating elements of both deflation (tight credit, low interest rates, generally moderate CPI) and inflation (high commodity prices), ensuring continued economic malaise. Combined with pending tax increases and additional costs associated with Obamacare and added regulation, it is an inhospitable climate in which to take economic risks. Investors and entrepreneurs are sidelined.

6) The bottom line is: supply-side tax rate cuts work, but not in a vaccum. The supply-side policy mix requires tax cuts and a stable dollar. The last decade proved Art Laffer's maxim that in terms of economic impact, if regulation is a one, tax cuts are a 10, and monetary policy is a 100. Get money wrong and you're sunk, no matter how good your fiscal policy.

*Note: tightening in this case refers to ceasing to loosen at the expected pace. From May to September 2008 the Fed paused its fast rate cuts at 2%, catching markets by surprise and leading to a mad scramble for cash. The dollar soared and gold plummeted. Bernanke may have paused due to CPI rising to 5.5% and oil hitting $140/barrel.

Thursday summary: Blom and The NY Sun applaud Newt's gold commission; Mitchell, IBD and Woodhill on Romney; Moore on Paul.

In The NY Sun, Andresen Blom suggests Newt Gingrich has a crucial wedge issue in his gold commission.

Also in The NY Sun applauds Gingrich’s gold commission idea but recommends moving beyond the commission to outright advocacy.

The WSJ validates Gingrich’s food stamp critique of President Obama.

At NRO, Larry Kudlow wonders whether Gingrich can highlight growth ideas over his personal issues.

On The Kudlow Report, Steve Forbes discusses Gingrich’s candidacy:



IBD defends the tax rate Mitt Romney pays.

On International Liberty, Dan Mitchell rebuts criticism of Romney’s tax payments.

In Forbes, Louis Woodhill argues companies like Romney’s Bain Capital are the alternative to bankruptcies and bailouts.

On Fox Business News, Stephen Moore discusses Ron Paul’s call to eliminate the income tax:



The Economist suggests the US/China trade deficit won’t be improved by appreciating the yuan.

Wednesday items: Newt proposes gold commission; Domitrovic on Romney at Bain; Jenkins on the financial meltdown.

Big news: The Weekly Standard reports Newt Gingrich advocates a gold commission:



The WSJ argues Mitt Romney should use news of his 15% tax rate to argue for fundamental tax reform.

At Forbes, Brian Domitrovic explains the economic context of Romney’s work at Bain Capital.

On The Kudlow Report, James Pethokoukis discusses Gingrich’s rise in the polls:



At RCM, John Tamny suggests Ben Bernanke was right in 2006 for wanting the Federal Reserve to let the mortgage market unwind.

In The WSJ, Holman Jenkins examines the causes of the 2008-09 financial meltdown, but omits Robert Mundell’s claim that the rapid 30% dollar appreciation in summer 2008 was the central factor.

On The Daily Beast, David Frum defends the 15% capital gains rate.

Futureofcapitalism rebuts The NYT on the capital gains tax rate.

On The Mike Rosen Show, Cato’s Alan Reynolds critiques Ronald McKinnon’s call for a wealth tax.



At IBD, Walter Williams notes the inequality of wealth creation as opposed to income.

From Fox News, David Pietrusza cites Calvin Coolidge on marginal tax rates:

If we had a tax whereby on the first working day the Government took 5 per cent of your wages, on the second day 10 per cent, on the third day 20 per cent, on the fourth day 30 per cent, on the fifth day 50 per cent, and on the sixth day 60 per cent, how many of you would continue to work on the last two days of the week?

From Alhambra Partner, Joe Calhoun worries at bullish sentiments.

At TGSN, Ralph Benko argues mismanagement of the gold standard led to the Great Depression.

On NRO, Jim Manzi considers how to cut marginal tax rates on the poor.

In The WSJ, actor Rick Moranis satirizes modern economic theories.

Thursday round up: Woodhill on tax increases; Mundell calls for China tax cuts; Luskin on trickle down economics.

From Forbes, Louis Woodhill explains why tax increases are destructive to GDP, the private sector, and government revenues.

On China Daily, Robert Mundell advocates tax cuts in China.

At Parcbench, Ralph Benko urges the GOP to have fun as the party of getting rich.

From TGSN, Kelly Hanlon reports from the recent Atlas Foundation conference on sound money.

On The Kudlow Report, US Rep. Ron Paul (TX) discusses his attack on Newt Gingrich:

 

From Cato, Kevin Dowd advocates a path back to a gold-linked dollar.

At The NY Sun, Seth Lipsky gives a favorable review to the new Thatcher movie.

TGSN reprints a NYT editorial from 1896 on the gold standard.

The WSJ suggests easier dollar borrowing for Europe won’t improve the situation much.

On Kudlow, Don Luskin discusses the stocks market:

 

On International Liberty, Dan Mitchell defends “trickle down” economics.

In The WSJ, Michael Auslin argues Japan is strong fundamentally but needs reform.

All this suggests that Japan needs more structural reform, particularly in three areas: reducing regulation, opening up to foreign direct investment, and expanding free-trade networks. Prime Minister Yoshihiko Noda's recent decision to join negotiations over the free-trade Trans-Pacific Partnership is a good start, but he needs to overcome opposition in his own party to assure full participation.

In The WSJ, former SEIU president Andy Stern argues the US should imitate China’s centrally planned economy.

The Rising Dollar and the Market's Decline.

Last May in The WSJ, I noted that despite commodity inflation, supply-side guru Robert Mundell predicted “a return to recession later this year when QE2 ends and the dollar begins its inevitable rise. Deflation, not inflation, should be the greater concern.”

Mundell has since noted he sees little threat of substantial US inflation because M1 money velocity has collapsed by half and is likely to stay down.



In the Journal article, I wondered how Mundell could be concerned with deflation when commodities including gold and oil were rising sharply, and explained his answer came from the exchange rate between the dollar and the euro, which Mundell calls “the most important price in the world.”

According to Mundell, the financial crisis of 2008 was set off by the dollar's rapid fall versus the euro from summer 2007 to spring 2008, followed that summer by an historic 30% dollar rise within three months, the largest major currency appreciation in peacetime history. (The dollar's rise is represented by the steep decline in the euro:)





The rising dollar caused gold to drop sharply:



Oil plummeted from $140 to below $40:

And the consumer price index plummeted from 5.5% to 0% that December, then to -2% in early 2009:



This rapid dollar appreciation caused liquidity to become tight in the midst of the subprime mortgage solvency crisis, freezing the financial system and causing the near-systemic failure.

Despite radical actions by US monetary authorities in the years since, in Mundell’s view, the gravitational pull on the dollar has been back to its strong position versus the euro.

In winter 2009, the Fed initiated its first quantitative easing program (QE1), which pushed the euro/dollar rate down, easing the liquidity crisis. When it ended in late 2009, the dollar rose sharply again, weakening the recovery. QE2 was initiated in summer 2010 and the dollar declined again, improving prospects for recovery.



Now, QE2 has ended, and there is talk of monetary easing from the ECB. These factors, perhaps combined with Europe’s mounting debt crisis, have pushed the dollar up versus the euro, with the euro falling from $1.45 in late August to $1.31 yesterday, a decline of about 10% in one month:
 


Confirming the stronger dollar, commodities have sold off impressively in recent weeks. Gold is down about $250 since its September high above $1,900:



While a rising dollar is usually a bullish signal, it may be that the Dow’s recent decline is due to investor memories of the last two dollar surges which coincided with tighter money, debt crisis, and contractionary pressures. Today’s market weakness may be due as much to worry about a soaring dollar as to other factors.

Time will tell, but so far Mundell’s unconventional analysis is holding up. Exchange rates -- the relative value between major currencies -- are as important as the absolute value signaled by gold in any discussion of stable money.

Wednesday summary: Rick Perry's Fed comments continue to garner attention; Salsman provides a history of gold; The WSJ notes the impact of higher taxes in Maryland.

RCP features Rick Perry continuing to critique the Fed.

Politico notes former Bush Administration officials critiquing Perry.

At Yahoo Finance, David Stockman endorses Rick Perry’s Federal Reserve criticism:

Reuters reports Michelle Bachmann joining the anti-Bernanke fray.

At Forbes, Richard Salsman provides an interesting history of the gold standard.

On First Trust, Brian Wesbury and Robert Stein suggest inflation is rising.

From The Kudlow Report, Brian Wesbury and Don Luskin debate inflation:




On RT America, Lew Rockwell discusses the Nixon Shock.

From 1971, Alan Reynolds blasts Nixon's price controls.

CNBC’s Squawk Box Europe features a good discussion of the gold standard:




The WSJ responds to Warren Buffett’s tax increase advocacy.

In The Washington Post, Jennifer Rubin reports Bill Bennett supports US Rep. Paul Ryan (WI) running for president.

The WSJ notes the decline of wealthy tax filers following last year’s soak-the-rich tax hikes in Maryland:

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

From 1979, Ronald Reagan announces his campaign for president (h/t: James Pethokoukis):




A new website promotes the Swiss gold franc.

At COAL, Paul Krugman notes bond vigilantes are only going after countries without their own currencies.

Monday items: Multiple authors mark the fiat dollar's 40th birthday; Tamny debates the dollar; Buffett advocates higher taxes.

A number of articles today mark the 40th anniversary of President Nixon severing the dollar from gold:

• The WSJ, Lewis Lehrman
• Forbes, Brian Domitrovic
• The Washington Examiner, Jeffrey Bell
• CNBC, Ralph Benko
• RCM, John Tamny
• TGSN, an open letter, multiple signatories
• The Telegraph (UK), Edmund Conway
• AEI’s The American, John A. Allison and John L. Chapman
• The NY Sun, editorial page

On The Kudlow Report, John Tamny debates gold and the dollar:




The Heritage Foundation advertises an October conference on dollar stability.

On Asia Times, David Goldman defends Wall Street against populist scapegoating.

In The NYT, billionaire investor Warren Buffett advocates higher taxes on the wealthy.

Also on Kudlow, Stephen Moore discusses Buffett’s article:

 


From The Freeman, Mark Skousen disputes the idea that consumer spending drives the economy.

At COAL, Paul Krugman sees inflation fears fading.

Friedman vs. Mundell on the Great Depression.

At The Freeman, Ivan Pongracic Jr. explains Milton Friedman’s view of the Great Depression.

From his 1999 Nobel speech, supply-side guru Robert Mundell outlines his view of the Depression:

World War I made gold unstable. The instability began when deficit spending pushed the European belligerents off the gold standard, and gold came to the United States, where the newly-created Federal Reserve System monetized it, doubling the dollar price level and halving the real value of gold. The instability continued when, after the war, the Federal Reserve engineered a dramatic deflation in the recession of 1920-21, bringing the dollar (and gold) price level 60 percent of the way back toward the prewar equilibrium, a level at which the Federal Reserve kept it until 1929.

It was in this milieu that the rest of the world, led by Germany, Britain and France, returned to the gold standard. The problem was that, with world (dollar) prices still 40 percent above their prewar equilibrium, the real value of gold reserves and supplies was proportionately smaller. At the same time monetary gold was badly distributed, with half of it in the United States. In addition, uncertainty over exchange rates and reparations (which were fixed in gold) increased the demand for reserves. In the face of this situation would not the increased demand for gold brought about by a return to the gold standard bring on a deflation? A few economists, like Charles Rist of France, Ludwig von Mises of Austria and Gustav Cassel of Sweden, thought it would….

Rist, Mises and Cassel proved to be right. Deflation was already in the air in the late 1920's with the fall in prices of agricultural products and raw materials. The Wall Street crash in 1929 was another symptom, and generalized deflation began in 1930. That the deflation was generalized if uneven can be seen from the percentage loss of wholesale prices in various countries from the high in 1929 to September 1931 (the month that Britain left the gold standard): Japan, 40.5; Netherlands, 38.1; Belgium, 31.3; Italy 31.0; United States, 29.5; United Kingdom, 29.2; Canada, 28.9; France, 28.3; Germany, 22.0.

The dollar price level hit bottom in 1932 and 1933….

For decades economists have wrestled with the problem of what caused the deflation and depression of the 1930's. The massive literature on the subject has brought on more heat than light. One source of controversy has been whether the depression was caused by a shift of aggregate demand or a fall in the money supply. Surely the answer is both! But none of the theories—monetarist or Keynesian—would have been able to predict the fall in the money supply or aggregate demand in advance. They were rooted in short-run closed-economy models which could not pick up the gold standard effects during and after World War I. By contrast, the theory that the deflation was caused by the return to the gold standard was not only predictable, but was actually, as we have noted above, predicted.

The gold exchange standard was already on the ropes with the onset of deflation. It moved into its crisis phase with the failure, in the spring of 1931, of the Viennese Creditanstalt, the biggest bank in Central Europe, bringing into play a chain reaction that spread to Germany, where it was met by deflationary monetary policies and a reimposition of controls, and to Britain, where, on September 21, 1931, the pound was taken off gold. Several countries, however, had preceded Britain in going off gold: Australia, Brazil, Chile, New Zealand, Paraguay, Peru, Uruguay and Venezuela, while Austria, Canada, Germany and Hungary had imposed controls. A large number of other countries followed Britain off gold.

Meanwhile, the United States hung onto to the gold standard for dear life. After making much of its sensible shift to a monetary policy that sets as its goal price stability rather than maintenance of the gold standard, it reverted back to the latter at the very time it mattered most, in the early 1930's.

Instead of pumping liquidity into the system, it chose to defend the gold standard. Hard on the heels of the British departure from gold, in October 1931, the Federal Reserve raised the rediscount rate in two steps from 1_ to 3_ percent dragging the economy deeper into the mire of deflation and depression and aggravating the banking crisis. As we have seen, wholesale prices fell 35 percent between 1929 and 1933.

Monetary deflation was transformed into depression by fiscal shocks. The Smoot-Hawley tariff, which led to retaliation abroad, was the first: between 1929 and 1933 imports fell by 30 percent and, significantly, exports fell even more, by almost 40 percent. On June 6, 1932, the Democratic Congress passed, and President Herbert Hoover signed, in a fit of balanced-budget mania, one of its most ill-advised acts, the Revenue Act of 1932, a bill which provided the largest percentage tax increase ever enacted in American peacetime history. Unemployment rose to a high of 24.9 percent of the labor force in 1933, and GDP fell by 57 percent at current prices and 22 percent in real terms.

The banking crisis was now in full swing. Failures had soared from an average of about 500 per year in the 1920's, to 1,350 in 1930, 2,293 in 1931, and 1,453 in 1932. Franklin D. Roosevelt, in one of his first actions on assuming the presidency in March 1933, put an embargo on gold exports. After April 20, the dollar was allowed to float downward.

The deflation of the 1930's was the mirror image of the wartime rise in the price level that had not been reversed in the 1920-21 recession. When countries go off the gold standard, gold falls in real value and the price level in gold countries rise. When countries go onto the gold standard, gold rises in real value and the price level falls. The appreciation of gold in the 1930's was the mirror image of the depreciation of gold in World War I. The dollar price level in 1934 was the same as the dollar price level in 1914. The deflation of the 1930's has to be seen, not as a unique "crisis of capitalism,” as the Marxists were prone to say, but as a continuation of a pattern that had appeared with considerable predictability before—whenever countries shift onto or return to a monetary standard. The deflation in the 1930's has its precedents in the 1780's, the 1820's and the 1870's.

What verdict can be passed on this third of the century? One is that the Federal Reserve System was fatally guilt of inconsistency at critical times. It held onto the gold standard between 1914 and 1921 when gold had become unstable. It shifted over to a policy of price stability in the 1920's that was successful. But it shifted back to the gold standard at the worst time imaginable, when gold had again become unstable. The unfortunate fact was that the least experienced of the important central banks—the new boy on the block—had the awesome power to make or break the system by itself.

The European economies were by no means blameless in this episode. They were the countries that changed the status quo and moved onto the gold standard without weighing the consequences. They failed to heed the lessons of history—that a concerted movement off, or onto, any metallic standard brings in its wake, respectively, inflation or deflation. After a great war, in which inflation has occurred in the monetary leader and gold has become correspondingly undervalued, a return to the gold standard is only consistent with price stability if the price of gold is increased. Failing that possibility, countries would have fared better had they heeded Keynes' advice to sacrifice the benefits of fixed exchange rates under the gold standard and instead stabilize commodity prices rather than the price of gold.

Had the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution and no World War II….

In April 1934, after a year of flexible exchange rates, the United States went back to gold after a devaluation of the dollar. This decreased the gold value of the dollar by 40.94 percent, raising the official price of gold 69.33 percent to $35 an ounce. How history would have been changed had President Herbert Hoover devalued the dollar, three years earlier!

France held onto its gold parity until 1936, when it devalued the franc. Two other far-reaching events occurred in that year. One was the publication of Keynes' General Theory; the other signing of the Tripartite Accord among the United States, Britain and France. One ushered in a new theory of policy management for a closed economy; the other, a precursor of the Bretton Woods agreement, established some rules for exchange rate management in the new international monetary system.

The contradiction between the two could hardly be more ironic. At a time when Keynesian policies of national economic management were becoming increasingly accepted by economists, the world economy had adopted a new fixed exchange rate system that was incompatible with those policies.

Monday items: Gold passes $1,700; Goldman cites the popping of the hedge fund bubble; Kudlow counsels calm.

Reuters reports gold passing $1,700/oz.

On Asia Times, Spengler (David Goldman) suggests the market selloff is linked to the popping of the hedge fund bubble.

At NRO, Larry Kudlow counsels calm amidst the market collapse.

On The Kudlow Report, Larry Kudlow interviews Harvard conservative Keynesian Greg Mankiw and former Fed official William Poole about Ben Bernanke’s next steps:



The Washington Post reports weak dollar Treasury Secretary Tim Geithner won’t leave his post anytime soon.

At The Freeman, Jeb Bleckly and Joshua C. Hall refute former-Gov. Eliot Spitzer’s (NY) claim that higher marginal tax rates have no effect on economic growth.

NRO features a symposium on unemployment, but only two of 13 contributors mention the dollar.

In The WSJ, Harvard’s Robert Barro recommends four good reforms and a fifth bad one (a VAT on top of income taxes.) His analysis omits a stable dollar:

First, make structural reforms to the main entitlement programs, starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula. Second, lower the structure of marginal tax rates in the individual income tax. Third, in the spirit of Reagan's 1986 tax reform, pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits—not to mention eliminating ethanol subsidies. Fourth, permanently eliminate corporate and estate taxes, levies that are inefficient and raise little money.

Fifth, introduce a broad-based expenditure tax, such as a value-added tax (VAT), with a rate around 10%.

In Time, Amy Sullivan suggests austerity economics may fracture the GOP coalition with Christian conservatives.

From The Witherspoon Institute, Carson Holloway argues the Balanced Budget Amendment violates conservative principles.