The Golden Revolution The Golden Revolution HOW TO PREPARE FOR THE COMING GLOBAL GOLD STANDARD John Butler John Wiley & Sons, Inc Copyright © 2012 by John Butler All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/ permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our website at www.wiley.com Library of Congress Cataloging-in-Publication Data: Butler, John The golden revolution : how to prepare for the coming global gold standard / John Butler online resource Includes index Description based on print version record and CIP data provided by publisher; resource not viewed ISBN 978-1-118-13648-5 (cloth); ISBN 978-1-118-23879-0 (ebk); ISBN 978-1-118-26340-2 (ebk); ISBN 978-1-118-22531-8 (ebk) 1. Gold standard. 2. Global Financial Crisis, 2008–2009. I. Title HG297 332.4'222–dc23 2012003750 Printed in the United States of America 10 9 8 7 6 5 4 3 2 For those waiting patiently for the sunrise Contents Acknowledgments ix Introduction: Why a Gold Standard Lies in Our Near Future Part I Why the Days of the Fiat Dollar Are Numbered Chapter The Window Closes 13 Chapter Stagnation, Stagflation, and the Rise of “Darth” Volcker 23 Chapter Of Bubbles and Bailouts 35 Chapter Why Financial Genius Fails, or, a Forensic Study of the 2008–2009 Global Credit Crisis 41 Chapter An Unstable Equilibrium 51 Chapter The Inevitability of Regime Change 73 Part II Running the Golden Gauntlet: Transition Scenarios Back to a Gold Standard 79 Chapter A Golden Bolt out of the Blue 85 Chapter Golden Preparations 95 Chapter Long-Forgotten Suggestions for How the United States Could Return to Gold vii 115 viii Contents Chapter 10 The Golden BRICs 125 Chapter 11 When All Else Fails, Enter the Gold Vigilantes 133 Part III The Economic, Financial, and Investment Implications of the Coming Global Gold Standard 137 Chapter 12 The Role of Central Banking under a Gold Standard 143 Chapter 13 Valuation Fundamentals under a Gold Standard 155 Chapter 14 Estimating Risk Premia under a Gold Standard 167 Chapter 15 Golden Winners and Paper Losers 181 Chapter 16 Some Implications of the Gold Standard for Global Labor and Capital Markets 189 Conclusion: The Golden Society 193 Further Reading 199 About the Author 206 Index 207 200 Further Reading Flandreau, Marc, and Mathilde Maurel “Monetary Union, Trade Integration, and Business Cycles in the 19th Century.” Open Economies Review 16 (2005): 135–152 Frankel, Jeffrey “The Effect of Monetary Policy on Real Commodity Prices.” In John Campbell, ed., Asset Prices and Monetary Policy, Chicago: University of Chicago Press, 2008 Frankel, Jeffrey “Peg the Export Price Index: A Proposed Monetary Regime for Small Countries.” Journal of Policy Modelling, June 2005 Friedman, Milton “Commodity-Reserve Currency.” Journal of Political Economy 59 (June 1951) Friedman, Milton “The Resource Cost of Irredeemable Paper Money.” Journal of Political Economy 94 (June 1986) Gallarotti, Giulio M “The Rise of the Classical Gold Standard: The Role of Focal Points and Synergistic Effects in Spontaneous Order.” Humane Studies Review (2001) Herbener, Jeffrey M “After the Age of Inflation: Austrian Proposals for Monetary Reform.” Quarterly Journal of Austrian Economics 5, no (Winter 2002) Kydland, Finn, and Edward C Prescott “Rules Rather than Discretion: The Inconsistency of Optimal Plans.” Journal of Political Economy 85 (June 1977) Laffer, Arthur B., and Charles W Kadlec “The Point of Linking the Dollar to Gold.” Wall Street Journal, October 13, 1982 McCallum, Bennett T “Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan.” Federal Reserve Bank of Richmond Economic Quarterly 86 (Winter 2000) McCallum, Bennett T “Robustness Properties of a Rule for Monetary Policy.” Carnegie-Rochester Conference Series for Public Policy 29 (Autumn 1988) McKinnon, R “The Rules of the Game: International Money in Historical Perspective.” Journal of Economic Literature 31 (1993): 1–44 Meissner, C.H “A New World Order: Explaining the Diffusion of the Classical Gold Standard.” National Bureau of Economic Research Working Paper 9233, September 2002 Meissner, M Christopher, and J Ernesto López-Córdova “Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era.” American Economic Review 93, no (March 2003): 344–353 Modigliani, F and M Miller “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review 48, no (June 1958): 261–297 Morys, Matthias “The Emergence of the Classical Gold Standard.” Economic History Society Annual Conference, Exeter (March 2007) Further Reading 201 Mundell, Robert M “Gold Would Serve into the 21st Century.” Wall Street Journal, September 30, 1981 Obstfeld, Maurice, and Alan M Taylor “Soverign Risk, Credibility and the Gold Standard: 1870–1913 versus 1925–1931.” National Bureau of Economic Research Working Paper 9345 (2002) Ohanian, Lee “What, or Who, Started the Great Depression?” Journal of Economic Theory 144, no (November 2009) Ohanian, Lee, and Harold Cole “Stimulus and the Depression: The Untold Story.” Wall Street Journal, September 26, 2011 Reinhart, Carmen, and Belen Sbrancia “The Liquidation of Government Debt.” NBER Working Paper 16893 (2011) “Reserve Accumulation and International Monetary Stability.” International Monetary Fund Working Paper, Strategy Policy and Review Department, April 13, 2010 Romer, Paul “Increasing Returns and Long Run Growth.” Journal of Political Economy 94, 1002–1037, 1986 Salerno, Joseph T “The Gold Standard: An Analysis of Some Recent Proposals.” CATO Policy Analysis 16, September 9, 1982 Sargent, T., and N Wallace “Rational Expectations, the Optimal Monetary Instrument and the Optimal Money Supply Rule.” Journal of Political Economy 83, no (April 1975) Schularick, M., and T Steger “International Financial Integration and Economic Growth—New Evidence from the First Era of Financial Globalization.” Center for Economic and Policy Research Selgin, George, and Lawrence H White “Credible Currency: A Constitutional Perspective.” Constitutional Political Economy 16 (March 2005) Taylor, John “Discretion versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39 (December 1993) Taylor, John “Monetary Policy During a Transition to Rational Expectation.” Journal of Political Economy 83, no (October 1975) Wanniski, Jude “A Job Only Gold Can Do.” New York Times, August 27, 1981 White, Lawrence H “Is the Gold Standard Still the Gold Standard among Monetary Systems?” CATO Briefing Papers 100 (February 8, 2008) Wolf, N “Europe’s Great Depression: Coordination Failure after the First World War.” Oxford Review of Economic Policy 26 (2010): 339–369 Books Akerlof, George A., and Robert J Shiller Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism Princeton, NJ: Princeton University Press, 2009 202 Further Reading Arthur, Brian W., John Holland, Blake LeBaron, and Richard Palmer The Economy as an Evolving Complex System II Brian Arthur, Steven Durlaf, and David Lane, eds Menlo Park: Addison-Wesley, 1997 Bayoumi, T., B Eichengreen, and M.P Taylor, eds Modern Perspectives on the Gold Standard Cambridge University Press, 1996 Bernstein, Peter Capital Ideas Evolving Hoboken, NJ: John Wiley & Sons, 2007 Bordo, M., and B Eichengreen, eds A Retrospective on the Bretton Woods System Chicago: University of Chicago Press, 1993 Brandeis, Louis Other People’s Money—And How the Bankers Use It 1914 Reprint by BiblioLife, 2009 Bresciani-Tirroni, Constantino The Economics of Inflation London: George Allen & Unwin, 1937 Cochran, P John, and R Fred Glahe The Hayek-Keynes Debate—Lessons for Current Business Cycle Research Edwin Mellen Press, 1999 Dorn, A James, and J Anna Schwartz, eds The Search for Stable Money: Essays on Monetary Reform Chicago: University of Chicago Press and the Cato Institute, 1987 Ebeling, M Richard, ed The Austrian Theory of the Trade Cycle and Other Essays Ludwig Von Mises Institute, 1996 Eichengreen, Barry Exorbitant Privilege Oxford University Press, 2011 Eichengreen, Barry, and M Flandreau, eds The Gold Standard in Theory and History, 2nd ed Routledge, 1997 Friedman, Milton, and Anna Schwartz A Monetary History of the United States, 1867–1960 Princeton, NJ: Princeton University Press, 1963 Garet, Garrett The Bubble That Broke the World Boston: Little, Brown, & Company, 1932 Auburn, AL: Ludwig von Mises Institute, 2007 Garrison, Roger Time and Money: The Macroeconomics of Capital Structure Routledge, 2001 Geisst, Charles R Wall Street: A History: From Its Beginnings to the Fall of Enron Oxford University Press, 2004 Gouge, William M A Short History of Paper Money and Banking Auburn, AL: Ludwig von Mises Institute, n.d Orig pub 1835 Guindley, Guillaume The International Money Triangle: Myths and Realities Trans Michael L Hoffman White Plains, NY: ME Sharpe, 1977 Hayek, F.A Denationalisation of Money: The Argument Refined Institute of Economic Affairs, 1990 Auburn, AL: Ludwig von Mises Institute, 2009 Hayek, F.A The Fatal Conceit: The Errors of Socialism University of Chicago Press, 1988 Hazlitt, Henry, ed The Critics of Keynesian Economics Princeton, NJ: D Van Nostrand Co., 1960 Hazlitt, Henry Economics in One Lesson New York: Harper & Brothers, 1946 Further Reading 203 Hazlitt, Henry From Bretton Woods to World Inflation: A Study of Causes and Consequences Regnery Gateway, 1984 Auburn, AL: Ludwig Von Mises Institute, 2008 Hazlitt, Henry The Inflation Crisis and How to Resolve It Auburn, AL: Ludwig von Mises Institute, 2009 Hazlitt, Henry What You Should Know about Inflation Princeton, NJ: D Van Nostrand Company, 1964 Heilbroner, Robert The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers New York: Simon & Schuster, 1953 Higgs, Robert Crisis and Leviathan: Critical Episodes in the Growth of American Government Oxford University Press and the Pacific Research Institute for Public Policy, 1987 Huerta De Soto, Jesus Money, Bank Credit and Economic Cycles Auburn, AL: Ludwig von Mises Institute, 2006 Issing, Otmar, Vitor Gaspar, Ignazio Angeloni, and Oreste Tristani Monetary Policy in the Euro Area Cambridge University Press, 2001 Jastram, W Roy, with updated material by Jill Leyland The Golden Constant Edward Elgar Pub., 2009 Kindleberger, Charles P Manias, Panics, and Crashes: A History of Financial Crises 4th ed New York: John Wiley & Sons, 2000 Lehrman, Lewis R A Monetary Reform Plan without Official Reserve Currencies: How We Get from There to Here Lehrman Institute, 2011 Lewis, Hunter Where Keynes Went Wrong Axios, 2009 Lindberg, Leon N., and Charles S Maier, eds The Politics of Inflation of Economic Stagnation Washington DC: Brookings Institution, 1985 Litan, Robert What Should Banks Do? Washington DC: Brookings Institution, 1987 Lowenstein, Roger When Genius Failed New York: Random House, 2000 Mandelbrot, Benoit The (Mis)Behavior of Markets: A Fractal View of Financial Turbulence New York: Basic Books, 2004 Markopolos, Harry No One Would Listen: A True Financial Thriller Hoboken, NJ: John Wiley & Sons, 2010 Markowitz, Harry M Portfolio Selection: Efficient Diversification of Investments New York: John Wiley & Sons, 1959 McCloskey, Donald N If You’re So Smart: The Narrative of Economic Expertise Chicago: University of Chicago Press, 1990 Melzer, Allan A History of the Federal Reserve Vol 2, book 2, 1970–1986 Chicago: University of Chicago Press, 2010 Mises, Ludwig von Economic Policy: Thoughts for Today and Tomorrow Auburn, AL: Ludwig von Mises Institute, 2006 Mises, Ludwig von Human Action New Haven: Yale University Press, 1949 Mises, Ludwig von The Theory of Money and Credit Trans H.E Baston New Haven: Yale University Press, 1953 204 Further Reading Murphy, P Robert The Politically Incorrect Guide to Capitalism Regnery, 2007 Murphy, P Robert The Politically Incorrect Guide to the Great Depression and the New Deal Regnery, 2009 Obstfeld, M., and A.M Taylor Global Capital Markets: Integration, Crisis, Growth Cambridge University Press, 2004 Odell, John S U.S International Monetary Policy: Markets, Power and Ideas as Sources of Change Princeton NJ: Princeton University Press, 1982 Powell, Jim FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression Three Rivers Press, 2003 Reinhart, Carmen M., and Kenneth S Rogoff This Time Is Different: Eight Centuries of Financial Folly Princeton, NJ: Princeton University Press, 2009 Reisman, George Capitalism: A Treatise on Economics Ottawa, IL: Jameson Books, 1996 Rickards, James Currency Wars: The Making of the Next Global Crisis New York: Portfolio/Penguin, 2011 Rizzo, Mario, and Lawrence White Foundations of the Market Economy Routledge Rothbard, Murray N America’s Great Depression Auburn, AL: Ludwig Von Mises Institute, 2000 Rothbard, Murray N The Case against the Fed Auburn, AL: Ludwig von Mises Institute, 1994 Rothbard, Murray N The Case for a 100% Gold Dollar Auburn, AL: Ludwig Von Mises Institute, 2005 Rothbard, Murray N A History of Money and Banking in the United States: The Colonial Era to World War II Auburn, AL: Ludwig von Mises Institute, 2005 Rothbard, Murray N The Mystery of Banking Auburn, AL: Ludwig von Mises Institute, 2008 Rothbard, Murray N The Panic of 1819 Auburn, AL: Ludwig von Mises Institute, 2007 Rothbard, Murray N What Has Government Done to Our Money? Auburn, AL: Ludwig von Mises Institute, 2005 Rueff, Jacques The Age of Inflation Trans Roger Glemet New York: Macmillan, 1964 Rueff, Jacques The Monetary Sin of the West Trans Roger Glemet New York: Macmillan, 1972 Salerno, Joseph T Money, Sound and Unsound Auburn, AL: Ludwig von Mises Institute, 2010 Samuelson, Paul, and William Nordhaus Economics New York: McGrawHill, 2009; first published 1948 Sargent, J Thomas Rational Expectations and Inflation New York: Harper & Row, 1986 Scammell, W.M International Monetary Policy: Bretton Woods and After New York: John Wiley & Sons, 1975 Further Reading 205 Schumpeter, Joseph Capitalism, Socialism, and Democracy New York: Harper & Row, 1950 Senholz, F Hans Age of Inflation Western Islands, 1979 Selgin, George A Less Than Zero: The Case for a Falling Price Level in a Growing Economy London: Institute for Economic Affairs, 1997 Selgin, George A The Theory of Free Banking: Money Supply under Competitive Note Issue Rowman & Littlefield, 1988 Shelton, Judy A Guide to Sound Money Washington, DC: Atlas Economic Research Foundation, 2010 Shiller, Robert Irrational Exuberance Princeton, NJ: Princeton University Press, 2000 Smith, Adam An Inquiry into the Nature and Causes of the Wealth of Nations Ed Kathryn Sutherland Oxford: Oxford University Press, 1998 Sornette, Didier Why Stock Markets Crash: Critical Events in Complex Financial Systems Princeton, NJ: Princeton University Press, 2003 Sylla, Richard, and Sidney Homer A History of Interest Rates 4th ed Hoboken, NJ: John Wiley & Sons, 2005 Studenski, Paul, and Herman Edward Krooss Financial History of the United States New York: McGraw-Hill, 1952 Treaster, Joseph B Paul Volcker: The Making of a Financial Legend Hoboken, NJ: John Wiley & Sons, 2004 White, H Lawrence Competition and Currency: Essays on Free Banking and Money New York: New York University Press, 1989 About the Author John Butler worked for over 15 years as an interest rate, foreign exchange, and commodity strategist at major banks around the world before setting up his own, independent investment firm in London in 2010, where he serves as the Chief Investment Officer He has written extensively on financial topics and has been quoted in the Financial Times, The Wall Street Journal, and the Frankfurter Allgemeine Zeitung, among other publications He is the author and publisher of the popular Amphora Report newsletter, posted regularly to a handful of prominent financial websites, and is an occasional speaker at global investment conferences He resides in the English countryside with his wife and four children 206 Index AIG, 48 Angell, Wayne, 98 Argentina, 129, 153–154 Australia, 60 Austrian Economic School, 61–62, 171 Austro-Libertarianism, 62 Bank of England, 101, 143 Bankruptcies, 7, 42–43, 46, 48, 102, 109, 168–172, 182 Bernanke, Ben, 58, 103 Black Monday, 35–36 Black-Scholes option pricing model, 43, 177 Bogle, John, 181 Brazil: currency appreciation in, 90–91 economy of, 2, 20, 81, 125–132, 135, 194 import/exports of, 128 reserve currency alternatives considered by, 126–132 Bretton Woods arrangements, 8–9, 10, 15–20, 25, 53, 68, 82–83, 109, 115 Bretton Woods II arrangements, 56–60, 77, 97–98 BRICs See Brazil; China; India; Russia Britain See United Kingdom Bryan, William Jennings, 123 Budget deficits See Deficits, budget Buffett, Warren, 175 Burgess, W Randolph, 116–117 Burns, Arthur, 14, 19, 120 Bailouts: banking and financial industry, 38, 40, 42, 47, 48–49, 176, 182 European, 160 risk premia impacted by, 49–50, 168–172, 176, 177–179, 182 suspension of future, 49, 179 Banking and financial industry See also Central banks bailouts for, 38, 40, 42, 47, 48–49, 176, 182 bankruptcies in, 7, 42–43, 46, 48, 102, 109, 182 credit/mortgage crisis involving, 2, 20, 39, 41, 46, 50, 56–60, 76, 79, 103, 120 free banking concept, 152–153 gold standard reestablishment impact on, 4, 98–99, 151–152, 182–183, 197 hypothetical Russian reserve currency impact on, 88–89 reserve requirements for, 149, 151–152 savings and loan crisis in, 37–40 value at risk (VAR) risk models used in, 43–50 Capital asset pricing model (CAPM), 172–178 Capital goods sector, 186 Capital market, global, 189–191, 196 207 208 Index Carter administration, 24, 26–28 Central banks: bailouts by (see Bailouts) Bank of England as, 101, 143 European Central Bank as, 62, 63–64, 65, 66, 160 Federal Reserve as (see Federal Reserve) fiat currencies requiring, 148–151 free banking vs., 152–153 interest rate involvement of, 153–154, 159, 168, 190 (see also under Federal Reserve) optional role of, 151–153 origins of, 143, 149–150 role of, under gold standard, 143–154 China: currency appreciation in, 90–91 economy of, 2, 20, 81, 125–132, 134, 191, 194 fixed exchange rates with, 67 gold reserves and asset accumulation of, 106, 126 imports/exports of, 128, 129 reserve currency alternatives considered by, 126–132 SDR-based system response of, 68 Churchill, Winston, 99–101, 120 Civil War, U.S., 10, 144–148, 150–151 Closing the Gold Window (Gowa), 19–20 Coinage Act (1792), 10, 151, 194 Complex systems theory, 140 Connally, John, 13, 14, 89 Constitution, U.S., 193–194, 196 Consumer price index, 37, 63, 108, 159, 164 Consumer products sector, 184–186 Creative destruction, 170, 171, 190, 196 Currency boards, 153–154 Deficits, budget: dollar reserve balances impacted by, 9, 16–20 gold standard leveling of, 16, 111–113, 118–119, 196 historical status of, 17 Keynesian and neo-Keynesian stance on, 34, 103 SDR system rewarding, 68 de Gaulle, Charles, 9, 15, 17–18, 81, 128 Depressions See Recessions and depressions Dooley, Michael, 56, 60 Economy See also Monetary system consumer expectations of, 25–27, 29–33, 35–36 credit/mortgage crisis impacting, 2, 20, 39, 41, 46, 50, 56–60, 76, 79, 103, 120 deficits impacting, 9, 16–20, 34, 68, 103, 111–113, 118–119, 196 equilibrium in, 51–71, 130 exorbitant privilege impacting, 15–21, 68, 77 fiat currencies and (see Fiat currencies) foreign (see specific countries/ continents by name) gold standard and (see Gold standard) gross domestic product measuring growth of, 162–164 inflation impacting (see Inflation) national security issues tied to, 85–94, 95–96 postwar rise of U.S., 8, 54–55 recessionary (see Recessions and depressions) savings and loan crisis impacting, 37–40 stagflation impacting, 23, 63, 134, 158 uncertainty impacting, 139–142, 155–156, 165, 170–172 Equilibrium: classical gold standard creating, 69–71 credit crisis destabilization of, 56–60 inflation targeting and, 62–64 Nash, 51–53, 54, 56, 68, 130 reserve currency changes altering, 53–56 special drawing rights and, 64–69 unstable, 51–71 Europe See also specific countries banking system crisis in, 47, 63, 159–160 classical gold standard emergence in, 69–71 dollar reserve balances of, 9, 14–18, 55, 82 economy of, 2, 8, 15–18, 47, 54–55, 60, 128, 159–160, 191, 195 European Central Bank, 62, 63–64, 65, 66, 160 inflation targeting policies in, 62–64 World War II in, 8, 55, 103, 104 World War I in, 8, 53–56, 99 Federal Deposit Insurance Corporation (FDIC), 37, 49 Federal Reserve: bailouts by (see Bailouts) Bernanke’s policies for, 58, 103 Index 209 creation of, 143 credit/mortgage crisis contributory actions of, 57–60, 120 gold backing requirements for, 18 Great Depression role of, 101–104 Greenspan’s policies for, 36–37, 39, 120 historical gold standard stance of, 1–2, 14, 19 hypothetical response to Russian reserve currency impacts, 88 inflation policies of, 1–2, 20–21, 33, 62–64, 126 interest rate manipulation by, 32–33, 35, 37, 38–39, 101, 103 money supply reserves of, 109–113 political criticism of, 123 Strong’s policies for, 101 Volcker’s appointment to/ policies for, 27–33 Federal Reserve Act (1913), 106 Federal Savings and Loan Insurance Corporation (FSLIC), 37–38 Fiat currencies: BRICs and other countries’ dissatisfaction with, 125–132 central banks and legal tender laws required for, 148–151 credit/mortgage crisis destabilization of, 56–60, 79 economic weaknesses of, 2–3, 7, 10–11, 25, 56–60, 76, 79, 131, 133, 141–142, 194–195 gold standard vs (see Gold standard) greenbacks as, 10, 144–148, 149, 150–151 210 Index Fiat currencies (cont’d ) historical development of, 8–11, 13–21, 25 hypothetical Russian dolar alternative to, 86–94, 130 interest rate relationship to, 149 preemptive suspension of, 97–113 special drawing rights as, 64–69, 79–80, 81 transition scenarios away from, 79–83, 93–94, 97–113, 115– 123, 125–132, 133–135 uncertainty associated with, 141–142 Fisk, Robert, 125, 127–128 Floating-rate notes (FRNs), 183–184 Folkerts-Landau, David, 56, 60 Forbes, Steve, 79 France: dollar reserve balances of, 9, 15–18, 55, 82 economy of, 8, 55 reserve currency alternatives considered by, 131 World War I role of, 53–54 Frankel, Jeffrey, 75 Free market: free banking as, 152–153 gold prices set by, 121–122, 133–135 Friedman, Milton, 102, 143, 151, 158, 189 Game theory, 51–52, 54 Garber, Peter, 56, 60 Germany, 9, 18, 54, 55, 131 Giscard d’Estaing, Valéry, 16–18 Global labor and capital markets, 189–191, 196 “Gold and Economic Freedom” (Greenspan), 118–119, 193 Gold Commission, 1, 105 Gold standard: British, 54, 99–102, 120 central banking role under, 143–154 classical, 15–16, 69–71, 74–75, 80, 83, 153 conversion rate to, 99–102, 105–106, 108–113, 120–122 currency credibility and, 29–32, 86, 88, 98, 106–107, 111 deficit leveling under, 16, 111–113, 118–119, 196 emergence of, 69–71 fiat currencies vs (see Fiat currencies) free market influences on, 121–122, 133–135 gold-owning restrictions and, 115–117, 193 gold prices and, 4, 9–10, 73–74, 75, 100, 106, 108–113, 120–122, 133–135, 138 gold reserve exhaustion, 9, 13, 19, 55 implications of return to, 137–142, 143–154, 155–166, 167–179, 181–188, 189–191, 196–198 independence of, from monetary policy, 75–77 inflation relationship to, 75, 93, 99–102, 105–107, 115–117, 122, 139, 142, 151, 181–182, 191, 197 interest rate relationship to, 75, 153–154, 155–166, 189–191 investments impacted by, 123, 137–142, 181–188 methods of returning to, 115–123 monetary regime changes and, 19–20 money supply adjustments and, 109–113 preemptive U.S return to, 97–113 preparatory steps to return to, 98–99, 105–106, 108–113 reasons for reestablishment of, 1–5, 73–77, 193–198 reserve currencies tied to, 8–9, 13–21, 53–56, 86–94, 97–113, 115, 125, 130–132 risk premia estimates under, 167–179, 197 suspension of, 1, 9, 10–11, 13–15, 19–21, 25, 27 transition scenarios back to, 79–83, 93–94, 97–113, 115– 123, 125–132, 133–135 valuation under, 155–166, 167–179 Gowa, Joanne, Closing the Gold Window, 19–20 Great Britain See United Kingdom Great Depression, 10, 102–104, 109, 115 Greece, 47, 160 Greenbacks, 10, 144–148, 149, 150–151 Greenspan, Alan, 2, 33, 35, 36–37, 39, 62, 118–120, 137, 193 Gresham’s Law, 3, 48 Gross domestic product (GDP), 162–164 Harsanyi, John, 51 Hayek, Friedrich, 61, 152 Hazlitt, Henry, 115–118, 120–122, 131, 151 Hobbes, Thomas, 193, 194 Hoover administration, 104 Index 211 Housing market: credit/mortgage crisis in, 2, 20, 39, 41, 46, 50, 56–60, 76, 79, 103, 120 savings and loan crisis in, 37–40 India: currency appreciation in, 90–91 economy of, 2, 20, 81, 125–132, 134–135, 194 reserve currency alternatives considered by, 126–132 Industrial sector, 183–187 Inflation: CAPM revealing impacts of, 172–176 credit/mortgage crisis relationship to, 59–60 futility of policies targeting, 62–64 gold standard relationship to, 75, 93, 99–102, 105–107, 115–117, 122, 139, 142, 151, 181–182, 191, 197 historical stabilization of, 1–2, 33 inflationary psychology, 29–31, 35 interest rates and, 157–161, 164–166, 172–176 Misery Index measuring, 23–24 SDR-based, 68 uncertainty associated with, 139–142 unemployment relationship to, 31–32, 62–63, 158, 191 U.S monetary policy impacting, 1–2, 20–21, 33, 62–64, 126 Interest rates: central bank involvement with, 153–154, 159, 168, 190 (see also Federal Reserve subentry) 212 Index Interest rates (cont’d ) credit/mortgage crisis impacted by, 57–59 estimating levels of, 161–162 estimating term structure of, 164–166 Federal Reserve manipulation of, 32–33, 35, 37, 38–39, 101, 103 fiat currency and, 149 floating-rate notes, 183–184 gold prices and, 109 gold standard relationship to, 75, 153–154, 155–166, 189–191 inflation and, 157–161, 164– 166, 172–176 real vs nominal, 157–161 risk-free, 157 saving or consumption reflecting, 155–156, 161–162, 165–166 International Monetary Fund (IMF), 59, 64–66, 67, 81 Investments: diversification of, 187–188 gold standard reestablishment implications for, 123, 137– 142, 181–188 interest rates on (see Interest rates) uncertainty impacting, 139–142, 155–156, 165, 170–172 Ireland, 47, 160 Italy, 47, 160 Japan, 2, 9, 59, 68, 128, 129 Jastram, Roy, 75, 108 Jefferson, Thomas, 193 Johnson administration, 16, 18 Keynesian economics/John Maynard Keynes, 31, 34, 62–63, 100–101, 103–104, 158 See also Neo-Keynesian economics Labor market, global, 189–191, 196 Lehman Brothers, 42, 47 Lincoln administration, 10, 144 Long-Term Capital Management (LTCM), 42–43, 176 Lucas, Robert, 158 Mandelbrot, Benoit, 178 Markowitz, Henry, 173 Menger, Carl, 61 MF Global, 7, 48 Miller, Bill, 27 Miller, Merton, 173 Mining industry, 184 Misery Index, 23–24 Modigliani, Franco, 173 Monetary system: central bank role in (see Central banks; Federal Reserve) fiat currencies in (see Fiat currencies) gold standard in (see Gold standard) monetary regime changes in, 19–21, 73–77, 79–83, 117–118 (see also specific presidential administrations) Mundell, Robert, 67, 71, 73 Muth, John, 158 Nash equilibrium/John Nash, 51–53, 54, 56, 68, 130 National debt See Deficits, budget National security issues, hypothetical, 85–94, 95–96 Neo-Keynesian economics, 4, 23, 31, 34, 102, 103, 163 Nixon administration, 1, 9, 10–11, 13–16, 19, 25, 27, 85–86 Norman, Montagu, 101 Oil industry, 23, 25, 90, 127, 128, 177 Okun’s law/Arthur Okun, 158 OPEC, 23, 25 Options, valuing financial assets as, 43, 176–178 Paul, Ron, 1, 105 Phillips curve/William Phillips, 31–32 Portugal, 47, 160 Rand, Ayn, 120, 193 Rational Expectations Theory (RET), 158 Read, Leonard, 140 Reagan administration, 1, 33, 105 Recessions and depressions: 1920s British, 101 1930s, 10, 102–104, 109, 115 1980s, 1, 32–33, 134 1990s, 37, 38 2008, 2, 20, 39, 41, 46, 50, 56–60, 76, 79, 103, 120 Reserve currencies: BRIC alternatives to, 126–132 German mark as, 18 hypothetical Russian dolar as, 86–94, 130 pound sterling as, 53–55 special drawing rights alternative as, 64–69, 79–80, 81 U.S dollar as, 7–11, 13–21, 53, 54–55, 56–60, 76–77, 79–81, 85–86, 88–89, 111, 115–123, 126–132, 194–195 Resolution Trust Corporation (RTC), 38 Richebächer, Kurt, 41, 59, 60, 61 Index 213 Rickards, Jim, 42–46, 47–49, 50, 85, 86, 95, 96–98, 131, 133, 178 Risk premia: bailout impact on, 49–50, 168–172, 176, 177–179, 182 CAPM valuation of, 172–178 with cash flow certainty, 167–170 with cash flow uncertainty, 170–172 estimating, under gold standard, 167–179, 197 option-based valuation of, 176–178 risk-free interest rates, 157 value at risk (VAR) risk models, 43–50 Rollover (movie), 95–96 Roosevelt (F.D.) administration, 10, 102, 104, 115 Rueff, Jacques, 9, 15, 55, 68, 69 Russia See also Soviet Union currency appreciation in, 90–91 economy of, 20, 81, 125–132, 194 gold reserves and asset accumulation of, 126–127 hypothetical reserve currency of, 86–94, 130 reserve currency alternatives considered by, 126–132 SDR-based system response of, 68 World War I role of, 54 Samuelson, Paul, 34 Sargent, Thomas, 107 Savings and loan crisis, 37–40 Schumpeter, Josef, 61, 170, 171, 190, 196 Schwarz, Anna, 102 Selgin, George, 152 214 Index Sharpe, William, 173 Silver standard, 7, 10 South Africa, 81 Soviet Union, 8, 25, 91, 97, 98, 134, 194 See also Russia Spain, 18, 47, 160, 195 Special drawing rights (SDR), 64–69, 79–80, 81 Spot market rate/spot price, 106, 108–109 Stagflation, 23, 63, 134, 158 Stock market crash (1929), 101–102 Stock market crash (1987), 35–36 Strong, Benjamin, 101 Technology sector, 39, 44, 48, 61, 187 Time preference, 156, 165 Tobin, James, 34 Uncertainty, 139–142, 155–156, 165, 170–172 Unemployment: gold standard reestablishment relationship to, 100–101, 191 inflation relationship to, 31–32, 62–63, 158, 191 Misery Index measuring, 23–24 United Kingdom: dollar reserve balances of, 14 economy of, 8, 54–55, 60, 128 gold standard in, 54, 99–102, 120 pound sterling reserve currency, 53–55 World War I role of, 53–54 U.S Civil War, 10, 144–148, 150–151 U.S Constitution, 193–194, 196 Utilities sector, 186–187 Valuation: capital asset pricing model for, 172–178 interest rate valuation under gold standard, 155–166 in nonnormal world, 178–179 option-based, 43, 176–178 risk premia estimates under gold standard, 167–179, 197 value at risk (VAR) risk models, 43–50 Vietnam war, 16, 24, 25, 26 Volcker, Paul, 1, 13–14, 23, 27–33 von Boehm-Bauwerk, Eugen, 61, 171 von Mises, Ludwig, 61, 155, 167, 168–169 Wanniski, Jude, 98 What You Should Know about Inflation (Hazlitt), 115–118, 120–122 White, Lawrence, 152 World Bank, 76 World War I, 8, 53–56, 99 World War II, 8, 55, 103, 104 Zoellick, Robert, 73, 76 ... The Golden Revolution The Golden Revolution HOW TO PREPARE FOR THE COMING GLOBAL GOLD STANDARD John Butler John Wiley & Sons, Inc Copyright... Library of Congress Cataloging-in-Publication Data: Butler, John The golden revolution : how to prepare for the coming global gold standard / John Butler online resource Includes index Description... attempt to end the Great Depression It would be left to President Nixon, however, to sever the link to gold entirely, which he did in August 1971, inaugurating the era of the 2 The history of the