[Congressional Record Volume 147, Number 98 (Monday, July 16, 2001)]
[Senate]
[Pages S7678-S7679]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            ECONOMIC GROWTH

  Mr. LOTT. Madam President, we have seen for the past year a reduction 
in the growth rate of our economy. The world is experiencing a global 
economic slowdown. The tax cut signed into law in June contained 
compromises to make the tax cuts in the lowest bracket retroactive to 
January 1. We are also going to begin to see the tax reduction checks 
in the American people's hands by the end of this month. Perhaps there 
has never been a better-timed tax cut. The dollars we are returning to 
the taxpayers and the rate cuts that will allow them to keep a little 
more of their own hard earned salaries will provide some stimulus to 
keep the economy from falling further behind.
  I reject the advice of those who say that now is the time for the 
government to retreat and try and take more money out of the American 
workers' pay envelopes. Nothing could be worse for a weakening economy. 
In fact, I believe that now is the time to find more ways to encourage 
economic growth. The tax cut provides some immediate stimulus and in 
the long-term some ways to keep the economy growing. But we need to 
look at ways to kick-start the supply side of the economy. One 
possibility is to cut the capital gains tax rates. I will be pursuing 
this effort in the coming weeks and months. Nothing is more important 
than to get our economy moving again at full speed.
  My friend Jack Kemp authored a most interesting and compelling 
article a couple of weeks ago in the Wall Street Journal. Thirty years 
ago when I came to Congress I first met Jack. He was then and continues 
to be a person who is not afraid to challenge the common norms of 
economic thought. In the 70's Jack led the charge for tax rate cuts to 
get the economy moving. We have too easily forgotten the hopelessness 
that many Americans felt in the late 1970's facing stagflation with no 
idea of how to turn the flagging U.S. economy around. Now we face a 
problem of a global slowdown. Jack suggests an answer. Many will try 
and dismiss his proposal. This is a debate that needs to continue.
  We need to get the American economy running at full speed. The tax 
bill was the first step. Getting the economy back to full growth will 
be my primary focus.
  I ask unanimous consent that the article by Mr. Kemp be printed in 
the Record.
  There being no objection, the article was ordered to be printed in 
the Record,  as follows:

             [From the Wall Street Journal, June 28, 2001]

                   Our Economy Needs a Golden Anchor

                             (By Jack Kemp)

       How many more dashed hopes and false recoveries must we 
     experience before politicians and monetary authorities accept 
     the fact that our inability to manage fiat currencies is 
     causing the global economic slowdown? They keep waiting for 
     interest-rate reductions to kick in, yet more than six months 
     after the Fed began lowering rates the economy continues to 
     weaken. Waiting for the recently enacted tax cuts to provide 
     ``stimulus'' will prove futile as well. The economy does not 
     suffer a lack of consumer demand, and more money in people's 
     pockets will not revive the supply side of the economy.


                        unprecedented experiment

       Ronald Reagan once said he knew of no great nation in 
     history that went off the gold standard and remained great. 
     Since Aug. 15, 1971, when the U.S. ceased to redeem dollars 
     held by foreign governments for gold, we have put that thesis 
     to the test. For the first time in human history, not a 
     single major currency in the world was linked to a commodity. 
     Economist Milton Friedman called the situation 
     ``unprecedented'' and said it is ``not a long-term viable 
     alternative.'' ``The world,'' he said, ``needs a long-term 
     anchor of some kind.''
       In the short term, at least, he was vindicated. In creating 
     a world monetary system

[[Page S7679]]

     of floating fiat currencies with the stroke of a pen, 
     President Nixon touched off a world-wide inflation that 
     lasted through the '70s and early '80s.
       Yet America recovered to preside over the demise of world 
     communism, and overcame the rising inflation and unemployment 
     of ``stagflation'' to enjoy an unparalleled 18-year economic 
     expansion. Today, the U.S. is at the pinnacle of its power 
     and enjoying its greatest prosperity ever.
       Were Messrs. Reagan and Friedman wrong? I don't think so. 
     If the U.S. has so far come out on top in this experiment, it 
     is only because other countries' economies have suffered even 
     more from floating currencies.
       Once the U.S. government ceased redeeming gold at $35 an 
     ounce, its price quadrupled on world markets to $140 to 
     reflect the dollar's diminished value. By breaking the gold 
     link, the Nixon economic team forced the unwanted liquidity 
     pouring out of the Fed--which had thus far built up in the 
     Eurodollar market and the portfolios of foreign central 
     banks--to remain inside the U.S. economy where it would 
     manifest itself in price inflation. Robert Mundell was the 
     first to predict, in January 1972, there would soon be a 
     dramatic rise in the price of oil, with general inflation to 
     follow.
       Where the rest of the economics profession blamed the Arab 
     oil-producing states for quadrupling the oil price in 1973, 
     Mr. Mundell and those supply-siders who followed his 
     intellectual lead knew that gold's quadrupling had led the 
     way. Tax rates rose through ``bracket creep,'' capital 
     formation stopped in its tracks, and it soon took two workers 
     to produce the same income that one had brought home before 
     the experiment. The stagflation that had its roots in leaving 
     the gold standard was compounded when Congress and three 
     different presidents tried to fight it with wage and price 
     controls and high marginal tax rates.
       But discretionary monetary policy is Janus-faced, and 
     instead of too much liquidity in the world economy we now 
     have too little. Deflation began in 1996 when the Fed 
     tightened monetary policy to combat some inflation it had 
     created attempting to offset the economic drag of the Clinton 
     tax hikes. A rising dollar then caused the dollar pegs of 
     emerging economies to snap, set off the Asian, Brazilian and 
     Russian economic meltdowns, and caused the price of oil and 
     other commodities to collapse. Oil producers took a two-year 
     holiday from drilling, which in turn created an oil shortage 
     and drove energy prices sky high.
       Now, the energy-price hikes are working their way through 
     the economy and are misconstrued by the Fed as inflation. 
     Once again, central bank errors in the discretionary 
     management of floating fiat currencies have put the entire 
     world economy at risk.
       The Fed has cut interest rates 275 basis points since the 
     start of the year, but the price of gold is still down to 
     about $272 from $385 in 1996, having fallen $5 yesterday 
     alone on the Fed's announcement that it was lowering the fed 
     funds rate another 25 basis points. Commodity prices are near 
     their lowest levels in 15 years, and the foreign-exchange 
     value of the dollar has risen against all major currencies 
     since the Fed began its interest rate-easing cycle.
       Without a gold standard, the Fed has no means of 
     determining how much liquidity markets demand, and all it 
     does by targeting interest rates is guess how much liquidity 
     to inject or withdraw to counteract mistakes it made earlier. 
     The Fed may be on its way to mimicking the mistakes the Bank 
     of Japan made when it lowered interest rates to zero, all the 
     while prolonging and deepening Japan's monetary deflation.
       This is no way to manage a currency. It's obvious that we 
     have accumulated a long series of small deflationary errors 
     by the Fed that are dragging down the U.S. economy and 
     helping depress world commerce. It's time to restore a golden 
     anchor to the dollar before our luck runs out and we suffer a 
     real economic calamity.
       The Fed may yet get lucky with its rate cuts, although the 
     Bank of Japan never did. The only certain way to end this 
     deflation is to have the Fed stop targeting interest rates 
     and begin targeting gold directly--not by ``fixing'' the 
     price of gold by administrative fiat as some people 
     mistakenly characterize it, but rather by calibrating the 
     level of liquidity in the economy, over which the Fed has 
     exclusive and precise control, to keep the market price of 
     gold stable within a narrow band closer to $325 than $275.
       There is nothing mysterious about how gold could be used as 
     a reference point or how a new monetary standard for a new 
     millennium would work. It would simply mean the Fed would 
     stop guessing how much liquidity is good for the economy and 
     allow the market to make that decision for it. With the 
     dollar defined in terms of gold and with American citizens 
     free to buy and sell gold at will, the Fed would forget about 
     raising or lowering interest rates and simply add liquidity 
     (buy bonds) when the price of gold tries to fall and subtract 
     liquidity (sell bonds) when it tries to rise. Markets would 
     determine interest rates.
       The paper dollar would once again be as good as gold--no 
     more, no less. There would be no need for the U.S. government 
     to maintain a large stock of gold or to redeem gold and 
     dollars on demand since people would be free to do so on 
     their own in the marketplace. As long as the Fed calibrated 
     its infusions and withdrawals of liquidity by the market 
     price of gold, the world would be free of monetary inflations 
     and deflations caused by the whims and errors of central bank 
     governors, as was the case for more than 200 years when the 
     private Bank of England managed the pound sterling in exactly 
     that way.


                            Nothing Simpler

       The good news is that this could all be done easily, if 
     President Bush and Treasury Secretary Paul O'Neill could work 
     out an accord with Alan Greenspan. That accomplished, I 
     believe Britain would soon follow to make the pound as good 
     as gold and avoid having to adopt a sinking euro.
       There is nothing simpler than a gold standard, as Alexander 
     Hamilton pointed out when he persuaded the first Congress to 
     adopt one. Just as President Nixon took us off with an 
     executive order, President Bush can put us back on with the 
     stroke of a pen. It would be politically popular, as ordinary 
     people benefit most. At Camp David in 1971, as President 
     Nixon signed the papers, he is reported to have said: ``I 
     don't know why I'm doing this. William Jennings Bryan ran 
     against gold three times and he lost three times.''

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