Porter Stansberry: Enough Already, Let's Return to the Gold Standard!

The money supply increases naturally by exactly the amount of increases in productivity in a healthy economy, notes Stansberry & Associates Investment Research Founder Porter Stansberry. He doesn't have to point out that the economy isn't healthy, nor that the money supply expands every time the printing presses run to bail out a failing business and bring on a new iteration of quantitative easing. The solution is a simple (albeit not necessarily easy) one, Porter tells us in this exclusive Gold Report interview: Return to the gold standard. That will happen, he says, when the people say, "Enough!"

The Gold Report: You've written a lot about the gold standard recently, and an article in your S&A Digest argues that we should greatly prefer gold-backed money because it would limit the ability to increase the money supply. It goes on to point out that increasing the money supply essentially causes inflation. If regulations prohibited governments from expanding the money supply, would fiat currency be as good as the gold standard?

Porter Stansberry: In theory, it could be, but in practice that's never happened. I suspect that the market wouldn't have much faith in such rules, and they'd be abused eventually. During the Volcker and Greenspan Federal Reserve periods, from roughly 1981– 2006, two central bankers created a de facto gold standard because they remained relatively consistent vis-à-vis money supply targets.

Volcker absolutely targeted money supply, as did Greenspan up until about 1999. He moved away from that stance due to Y2K fears and then the 2001–2002 recession. So we've seen long periods in fiat systems where money supply growth was targeted and fairly reliable.

The problem, of course, is that the gold-standard rules don't apply across the banking systems. When the Fed was targeting money supply, bankers lobbied for all kinds of changes related to reserve ratios, which allowed them to massively increase the leverage on their balance sheets. Famously, the investment banks—Bear Stearns, Lehman Brothers and others—went from, say, 15:1 to 50:1. That had a tremendous impact on the amount of credit in the economy, which ultimately led to the collapse we well remember. Then the Fed started to radically increase the money supply to help reduce the impact of those bad loans.

That's a long way of saying that efforts to mirror a gold standard by rule have never been effectual in history, and they haven't worked in America over the past 40 years.

TGR: So changing the reserve requirements, in essence, increased the money supply.

PS: Let's talk definitions. When I'm talking about the monetary base, I'm talking about the size of the Fed's balance sheet, which is the foundation of the U.S. fractional reserve banking system. When you increase the size of the Fed's balance sheet, you can have multiple increases of the actual money supply from that base. By targeting that base, Volcker restrained credit growth in the economy. Greenspan was less successful at that because he chose to expand the monetary base for political reasons.

In any case, just controlling the monetary base did not control the impact of increases to banks' balance sheets and leverage ratios, simply because they lobbied successfully to change the rules. They got permission to increase their leverage. The monetary base didn't change, but the money supply increased due to the actions of the banks. It would have been impossible under a gold standard for the simple reason that the banks would be subject to runs on their gold. That doesn't happen in a paper system.

I'm not saying that there would never be another run on a bank, but bankers would have a palpable fear of losing control under a gold standard because the market discipline is so much fiercer now. They never would have leveraged 50:1 under a gold standard. It would have been completely implausible.

But as long as there's this notion that they can get a bailout of any size by turning on the printing press, maybe the discipline isn't quite so sound. That's exactly what we're seeing. So rather than allowing runs on the bank or rather than allowing banks to default and for depositors to lose, the government is printing as much money as is required and is giving it to the banks. (more)