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Home » Opinion » Book review
A golden oldie spins tale of gold, dollars
By Wan Lixin |
April 4, 2009, Saturday
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Print Edition
Print Edition
PETER Bernstein's "A Primer on Money, Banking and Gold" is an old book first published in the mid-1960s.
Ironically this vintage feature actually enhances its relevance today.
It is worth revisiting Bernstein's simple explanation of the fundamental workings of the Federal Reserve and the role of commercial banks, as the drama of "boom and bust," or "boom and Armageddon," is unfolding.
In this learned but accessible classic the author explains what creates and destroys money, how the Federal Reserve interacts with banks, and what role gold has played in global finance.
When the book was published, the Bretton Woods system that stabilized international currency around the gold-backed US dollar was still in place.
In 1971, US President Richard Nixon decided that those who held American dollars could no longer exchange them for gold.
That was when the United States needed money to support the Vietnam War, and its overseas investments.
With the end of gold convertibility, there was practically no check on spending by the United States - as there is now no fear of gold outflow.
All it needs to do is to turn on a printing press at the US Mint.
This new system has fueled hectic global growth and a global assets bubble that was mistaken for prosperity, and in that "prosperity" were planted the seeds of the economic devastation.
As Joseph Stiglitz said recently, "It's clearly a very strange global economic phenomenon, that the global economic system requires the richest country to consume beyond its means to keep the global economy growing."
But politicians, economists, and market participants are too busy to be disturbed by these underlying imbalances - politicians are eying the next election, economists are paralyzed by negative GDP growths, and CEOs are concerned with their quarterly earnings.
China's central bank governor Zhou Xiaochuan recently suggested the need to create a "super-sovereign reserve currency" instead of using the currency of one nation as the global reserve currency.
A UN panel of financial experts also called for a basket of currencies to replace the greenback.
But US President Barack Obama said at a press conference last week that confidence in the US economy and the dollar was "extraordinarily strong" and that he did not believe there was a need for a global currency.
What the US has done recently clearly does not encourage that kind of confidence.
Obama's astronomical economic stimulus plans is weakening the dollar, and eating into China's mammoth foreign reserve holdings.
As Bernstein says in the book, "Regulation of the supply of money ... is intimately involved with our prosperity and with our social tranquility ... a subject with the broadest political and economic implication."
There is little hope of the US willingly addressing deeper problems, even in a crisis.
At Stiglitz said, the deeper problem of the current crisis is the growing economic inequality as money and assets are moving from those who can spend it at the bottom to those who cannot spend it at the top.
A fundamental solution would mean the US would have to stop using global trade to plunder poor countries' resources and money to finance its destructive lifestyle.
Ironically this vintage feature actually enhances its relevance today.
It is worth revisiting Bernstein's simple explanation of the fundamental workings of the Federal Reserve and the role of commercial banks, as the drama of "boom and bust," or "boom and Armageddon," is unfolding.
In this learned but accessible classic the author explains what creates and destroys money, how the Federal Reserve interacts with banks, and what role gold has played in global finance.
When the book was published, the Bretton Woods system that stabilized international currency around the gold-backed US dollar was still in place.
In 1971, US President Richard Nixon decided that those who held American dollars could no longer exchange them for gold.
That was when the United States needed money to support the Vietnam War, and its overseas investments.
With the end of gold convertibility, there was practically no check on spending by the United States - as there is now no fear of gold outflow.
All it needs to do is to turn on a printing press at the US Mint.
This new system has fueled hectic global growth and a global assets bubble that was mistaken for prosperity, and in that "prosperity" were planted the seeds of the economic devastation.
As Joseph Stiglitz said recently, "It's clearly a very strange global economic phenomenon, that the global economic system requires the richest country to consume beyond its means to keep the global economy growing."
But politicians, economists, and market participants are too busy to be disturbed by these underlying imbalances - politicians are eying the next election, economists are paralyzed by negative GDP growths, and CEOs are concerned with their quarterly earnings.
China's central bank governor Zhou Xiaochuan recently suggested the need to create a "super-sovereign reserve currency" instead of using the currency of one nation as the global reserve currency.
A UN panel of financial experts also called for a basket of currencies to replace the greenback.
But US President Barack Obama said at a press conference last week that confidence in the US economy and the dollar was "extraordinarily strong" and that he did not believe there was a need for a global currency.
What the US has done recently clearly does not encourage that kind of confidence.
Obama's astronomical economic stimulus plans is weakening the dollar, and eating into China's mammoth foreign reserve holdings.
As Bernstein says in the book, "Regulation of the supply of money ... is intimately involved with our prosperity and with our social tranquility ... a subject with the broadest political and economic implication."
There is little hope of the US willingly addressing deeper problems, even in a crisis.
At Stiglitz said, the deeper problem of the current crisis is the growing economic inequality as money and assets are moving from those who can spend it at the bottom to those who cannot spend it at the top.
A fundamental solution would mean the US would have to stop using global trade to plunder poor countries' resources and money to finance its destructive lifestyle.
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