[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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