May 19, 2011
"Most Americans believe the massive federal budget deficit is a very serious problem that will create hardships for future generations," found a CBS News/New York Times poll earlier this year.
This finding is consistent with a number of other surveys which have been conducted in recent months. Poll after poll shows that the majority of Americans are deeply concerned about out-of-control spending, runaway budget deficits, and the ballooning national debt.
The concern is amply justified given that our federal government is essentially bankrupt. With a national debt of $14.3 trillion and with $100 trillion plus in long-term entitlement liabilities, it has assumed more obligations that it can ever conceivably make good upon.
Remarkably, neither of the two major political parties is willing to take meaningful measures to address this existential crisis. Even though they both talk about the need to cut deficits and bring spending under control, the practical result of their proposals and actions is the same -- more spending, more debt, and more deficits.
But there is a way to bring about restraint. It is called the gold standard, and it is the only foolproof method of placing the government under fiscal discipline.
Under the gold standard all financial instruments -- including dollar notes and government securities -- must ultimately be backed by existing physical metal. At today's prices, America's national debt would roughly translate into double all the gold ever mined. This should give a good idea of the excessiveness involved here. In any case, the gold standard would have made it impossible for the fiscal fix we are now in to come about.
It is quite possible that under the gold standard our government would run surpluses on a regular basis. When debts are incurred in a world of real money, the first question voters usually ask is: "Where is our government going to get the gold required to satisfy its obligations?"
Since gold cannot be manufactured at will in some government facility, there is obviously only one place where it can come from: From the population, through taxation.
When deficits balloon under the gold standard, people are acutely conscious of the fact that it is with their own gold -- real and precious -- that budget shortfalls will have to be paid for.
Thus under the gold standard, the reality of debt is driven home in a hard and immediate way. With an electorate so sensitized, debt-addicted politicians tend to quickly suffer the consequences of their profligate ways. It is, therefore, no surprise that governments whose currencies are pegged to gold almost always behave in fiscally responsible fashion.
Under a fiat money regime such as we have now, the situation is altogether different. Debt can be run up easily, because politicians are not tied to anything real that would put a check on how much of it can be issued. Even when the bonds themselves come due, government can simply create more money to pay off creditors.
When this money also happens to be the world's reserve currency, the temptation to be irresponsible is especially acute. Hence we now have a situation now in the United States whereby the federal government borrows 42 cents of every dollar it spends.
The gold standard would change matters dramatically by immediately forcing fiscal discipline on Washington. This was pointed out last week by Steve Forbes who came out in favor of the gold standard in an interview with editors of Human events: "With a stable currency [i.e., gold-backed dollar], it is much harder for governments to borrow excessively," he said.
It is, indeed. This quality of the gold standard is sometimes referred to as the golden shackles. And it is the main reason why politicians everywhere oppose it with such vigor.
But never mind the displeasure of the political elites. Under the gold standard most of us would be much better off. The gold standard would protect the purchasing power of our earnings and the long-term value of our savings by preventing politicians from degrading our money with debts without limit.
