Gold and the Fed

Judy Shelton’s critique of the Federal Reserve System under Chairman Ban Bernanke (The Wall Street Journal on January 8, 2010) was headed for a touchdown. She correctly identifies gold securities as having the potential for protecting the American public from inflation and providing guidance for monetary policy.

But she fumbles the ball on the goal line when she suggests legislation to establish a new Treasury security based on the price of gold. Why do this when there already exist gold futures and options contracts on the Chicago Mercantile Exchange? These contracts are very liquid and go out to December of 2014. Moreover, there are interest rate securities, S&P 500 contracts and foreign exchange futures and options. The Forex contracts were established after being endorsed by Milton Friedman in the wake of the elimination of fixed exchange rates in August of 1971. Essentially, the Forex contracts became the substitute for the major mission of the International Monetary Fund.

The gold and other contracts could also be a partial substitute for the Fed by providing insurance against the changing value of the dollar.

Jim Johnston (jjohnston@heartland.org) is an economic policy advisor to The Heartland Institute.