sailingaway
05-28-2013, 10:59 PM
The gold “price rule” denotes the monetary reform proposal put forth in various forms by a number of supply-siders, including Arthur Laffer,[1] Robert Mundell,[2] and Jude Wanniski.[3] Laffer’s detailed formulation of the proposal also served as the basis of the Gold Reserve bill, introduced in the Senate by Jesse Helms in January 1981.[4]
The scheme has reared its head once again in H.R. 1576, the “Dollar Bill Act of 2013,” introduced by Congressman Ted Poe, and strongly supported by Steve Forbes.
According to Laffer’s blueprint from the 1980s, at the end of a previously announced transition period of three months, the Federal Reserve would establish an official dollar price of gold “at that day’s average transaction price in the London gold market.”[5] From that date onward, the Fed would stand ready to freely convert dollars into gold and gold into dollars at the official price. In addition, “when valued at the official price, the Federal Reserve will attempt over time to establish an average dollar value of gold reserves equal to 40 percent of the dollar value of its liabilities.”[6] This level of gold reserves Laffer designates the “Target Reserve Quantity.”
Once Laffer’s plan was fully operational, the Fed would have full discretion in conducting monetary policy through discounting, open market operations, etc., provided that: the dollar remains fully convertible into gold at the official price; and the quantity of actual gold reserves does not deviate from the Target Reserve Quantity by more than 25 percent in either direction, i.e., actual gold reserves do not fall below 30 percent or rise above 50 percent of the Fed’s liabilities, which are also known as the “monetary base.” However, should gold reserves decline to a level between 20 percent and 30 percent of its liabilities, the Fed would lose all discretion in determining the monetary base which, as a result, would be completely frozen at the existing level. If, in spite of this, gold reserves continued to decline to between 10 percent and 20 percent of the Fed’s liabilities, the Fed would be legally constrained to reduce the monetary base at the rate of one percent per month.
Should these measures prove incapable of arresting the decline in the dollar value of gold reserves before it reaches less than 10 percent of Fed liabilities, then:
The dollar’s convertibility will be temporarily suspended and the dollar price of gold will be set free for a three month adjustment period.
During this temporary period of inconvertibility, the monetary authorities will be required to suspend all actions that would affect the monetary base. Again, the price of gold would be reset as before and convertibility would be reinstated.[7]
Laffer’s plan also includes “a symmetric set of policy dicta” which are to be implemented in the case in which actual gold reserves exceed the Target Reserve Quantity.
It must first be pointed out that Laffer’s monetary reform proposal, whatever its merits or drawbacks, is not a blueprint for the gold standard. Rather, it is an outline of an elaborate scheme for legally constraining the monetary authority to adhere to a “price rule” in determining the supply of fiat money in the economy. In fact, as Laffer himself has made clear recently, gold has no necessary role in the implementation of such a price rule. According to Laffer and Miles:
… the Fed would institute its dollar “price rule” by stabilizing the value of the dollar in terms of an external standard. This standard would be a single commodity or a basket of commodities (a price index).…
Regardless of precisely which external standard is chosen, there are two basic rules of Fed behavior under the price rule. First, if the dollar price of the standard starts to rise (the dollar starts to fall in value), the Fed must reduce the quantity of dollars through open market sales of bonds, foreign exchange, gold, or other commodities. Second, if the dollar price starts to fall (the dollar rises in value), the Fed must increase the quantity of dollars through open market purchases of bonds, foreign exchange, gold or other commodities. The Fed is charged with keeping the value or price of the dollar stable in terms of the external standard.[8]
Compare this to Forbes’s explanation of Poe’s 2013 plan:
more at link: http://mises.org/daily/6442/A-Substandard-Golden-Rule
The scheme has reared its head once again in H.R. 1576, the “Dollar Bill Act of 2013,” introduced by Congressman Ted Poe, and strongly supported by Steve Forbes.
According to Laffer’s blueprint from the 1980s, at the end of a previously announced transition period of three months, the Federal Reserve would establish an official dollar price of gold “at that day’s average transaction price in the London gold market.”[5] From that date onward, the Fed would stand ready to freely convert dollars into gold and gold into dollars at the official price. In addition, “when valued at the official price, the Federal Reserve will attempt over time to establish an average dollar value of gold reserves equal to 40 percent of the dollar value of its liabilities.”[6] This level of gold reserves Laffer designates the “Target Reserve Quantity.”
Once Laffer’s plan was fully operational, the Fed would have full discretion in conducting monetary policy through discounting, open market operations, etc., provided that: the dollar remains fully convertible into gold at the official price; and the quantity of actual gold reserves does not deviate from the Target Reserve Quantity by more than 25 percent in either direction, i.e., actual gold reserves do not fall below 30 percent or rise above 50 percent of the Fed’s liabilities, which are also known as the “monetary base.” However, should gold reserves decline to a level between 20 percent and 30 percent of its liabilities, the Fed would lose all discretion in determining the monetary base which, as a result, would be completely frozen at the existing level. If, in spite of this, gold reserves continued to decline to between 10 percent and 20 percent of the Fed’s liabilities, the Fed would be legally constrained to reduce the monetary base at the rate of one percent per month.
Should these measures prove incapable of arresting the decline in the dollar value of gold reserves before it reaches less than 10 percent of Fed liabilities, then:
The dollar’s convertibility will be temporarily suspended and the dollar price of gold will be set free for a three month adjustment period.
During this temporary period of inconvertibility, the monetary authorities will be required to suspend all actions that would affect the monetary base. Again, the price of gold would be reset as before and convertibility would be reinstated.[7]
Laffer’s plan also includes “a symmetric set of policy dicta” which are to be implemented in the case in which actual gold reserves exceed the Target Reserve Quantity.
It must first be pointed out that Laffer’s monetary reform proposal, whatever its merits or drawbacks, is not a blueprint for the gold standard. Rather, it is an outline of an elaborate scheme for legally constraining the monetary authority to adhere to a “price rule” in determining the supply of fiat money in the economy. In fact, as Laffer himself has made clear recently, gold has no necessary role in the implementation of such a price rule. According to Laffer and Miles:
… the Fed would institute its dollar “price rule” by stabilizing the value of the dollar in terms of an external standard. This standard would be a single commodity or a basket of commodities (a price index).…
Regardless of precisely which external standard is chosen, there are two basic rules of Fed behavior under the price rule. First, if the dollar price of the standard starts to rise (the dollar starts to fall in value), the Fed must reduce the quantity of dollars through open market sales of bonds, foreign exchange, gold, or other commodities. Second, if the dollar price starts to fall (the dollar rises in value), the Fed must increase the quantity of dollars through open market purchases of bonds, foreign exchange, gold or other commodities. The Fed is charged with keeping the value or price of the dollar stable in terms of the external standard.[8]
Compare this to Forbes’s explanation of Poe’s 2013 plan:
more at link: http://mises.org/daily/6442/A-Substandard-Golden-Rule