Capitalist Crooks Jude Wanniski July 8, 2002

Memo To: Chairman Michael Oxley, House Financial Services Committee
From: Jude Wanniski
Re: A Letter to the Financial Times

The various scandals surfacing in corporate America have put you and your committee in the spotlight for the first time since you became chairman. I don’t think we’ve ever met, although I’ve appeared before your committee on various occasions. Some did tell me you were a “hard-money man,” which suggests we might get along, as I have been arguing for many years that our floating dollar, as light as a feather, is messing up global commerce. “Capitalism” is in trouble, the lefties are saying, and they are right, because capitalism cannot properly function with a floating unit of account. Instead of totally concentrating on the new laws Congress might pass to make life difficult for the Enrons and Worldcoms, you might consider putting a focus on why Congress itself has abandoned its Constitutional responsibilities to provide sound money, with the aim of once again fixing the dollar’s value to gold, the most monetary of all commodities. If you are a “hard-money man,” I take it you do not advocate a silver standard or a soybean standard. If we had been on a gold standard in recent years, neither Enron nor Worldcom would have happened.

This is explained in a letter last week to the Financial Times of London. Its chief financial columnist, Martin Wolf, whose opinions I respect, wrote about our scandals and came up with “a plan” to rescue capitalism from the clutches of private corporate crooks. Robber barons and such. Here is the letter I wrote to the FT, Congressman, which more or less gives you an idea on why any “plan” to save capitalism that does not fix the money will not work. I sent a copy to Mr. Wolf, who quickly replied that he did not agree with me – but I seem to have difficulty in getting him to say why I’m wrong. If you disagree, I hope you at least will understand why, but if you agree, you should hold hearings. I would be happy to testify. Capitalism itself is at stake!

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To the Editor of the FT:

Martin Wolf's "Rescue Plan for Capitalism," (July 3) begins with the observation that "the trickiest question in capitalism is how precisely companies can be controlled." Perhaps, but the question becomes trickiest in a capitalist system with a floating unit of account. The floating dollar is at the core of the problem in America today.

The simple reason for the accounting miseries now surfacing with Enron and Worldcom et al is that we are not on a gold standard -- and for the last 30 years have been struggling through inflations and deflations. The U.S. Savings&Loan crisis of the 1980's was the result of the inflation, which made it impossible for creditors to recover their assets. An S&L needs a gold footing so it can borrow short and lend long. When those who made the worst loans faced bankruptcy, they made riskier and riskier loans, trying to make up for the losses. Those who were caught went to jail. Those who survived then benefitted from the deflation that followed, where customers were required to give the S&Ls more in real terms than they had borrowed.

This is what has happened in the current monetary deflation, which has transpired over the last five years, with gold falling from $383 to as low as $253, now at $310. For the economy to recover, gold would have to be at $350, and it cannot get there as long as the Federal Reserve is not (and has no means) to target gold. At the margin, those debtors who could not pay their debts juggled the books, hoping for economic recovery that was promised by the Bush tax cuts and the Greenspan interest rate cuts, neither of which can solve the monetary deflation. When the recovery did not come, the jugglers at Enron and Worldcom, etc., had to come clean. It is something like the otherwise honest bank teller promising to return the cash as soon as his luck improves at the race track.

Note the gold price has been in decline these last few weeks. This, I believe, is the result of the lower risks of political terrorism, as there has been progress toward diplomatic solutions in the Middle East and on the subcontinent. When there is increased risk of doing business, there is less demand for dollar liquidity, and if the Fed does not drain it off, the gold price rises. When the risk declines, there is more demand for liquidity and if the Fed does not supply it, the gold price falls.

This is a nonsensical way to manage a domestic monetary regime, let alone a global capitalist system. No amount of new rules and accounting procedures can keep pace with such monetary turbulence in the unit of account. Unless the United States takes the lead in re-establishing a dollar/gold foundation to the world economy, it will have to be done elsewhere. Either Europe or Greater China have the economic mass required to anchor the world monetary system to their currencies, as the United Kingdom once did.

Sincerely,

Jude Wanniski