US To Return To Gold Standard. Really?
Thursday, July 7, 2011 at 8:42PM Tonight we turn the floor over to friend and subscriber, Robert Blumen. Robert is a regular contributor to the Ludwig Von Mises Institute and LewRockwell.com and has previously contributed articles to TDV including, "Why Value Investors Hate Gold" and "Why Gold Mining Supply Has No Bearing on the Price of Gold". The following is his response to Steve Forbes' recent comments on a return to the gold standard:
Publisher Steve Forbes, speaking to Human Events predicted "a return to the gold standard by the United states within the next five years". Why? Because it would "help the nation solve a variety of economic, fiscal, and monetary ills".
Steve ForbesThe article continues:
Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. ...
If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS. ...
[...] the idea “makes too much sense” not to gain popularity as the U.S. economy struggles to create jobs, recover from a housing bubble induced by the Federal Reserve’s easy-money policies, stop rising gasoline prices, and restore fiscal responsibility to U.S. government’s budget, Forbes insisted.
With a stable currency, it is “much harder” for governments to borrow excessively, Forbes said.
That's all good stuff, Steve. But really? Are you kidding?
In politics, things generally don't happen because they "help the nation" or "make too much sense". If we lived in that kind of world, and the 19th century gold standard had so much going for it, then why was it abandoned in favor of the present system?
It was abandoned for political reasons. Factors leading to the demise of the gold standard were the desire of governments to spend in excess of politically tolerable levels of taxation, the desire to finance World War I and other wars, and the wishes for a lender of last resort to bail out over-leveraged banks when they had insufficient reserves to cover their losses.
Political reasons have a logic of their own quite different from the kind of logic that Forbes is using in which good things happen for good reasons. In politics, interest groups organize to gain influence over the government and implement policies for their own benefit, at the expense of the rest of society.
But why does political logic defeat common sense? The public choice school of economics has given us an explanation of the insidious process by which the few exploit the many. They point out that concentrated benefits and dispersed costs lead to rational ignorance. Translating, "concentrated benefits" are the large returns earned by the privileged groups through subsidies or bailouts.
For each one of us tax payers, the cost of any individual bailout or welfare program is quite small, hence "dispersed costs". In looking at political action to fight the system, the individual taxpayer faces the following set of tradeoffs: the time and effort to understand even one piece of legislation or policy is substantial, and even if opposition to a particular program were effective, it would only save a few dollars per individual in taxes. This leads to "rational ignorance", the decision by most taxpayers that the return to working harder at your job or just enjoying life is much greater than the return to political organizing.
Given outcomes that are dominated by public choice logic, the monetary system will not be reformed when "it makes too much sense" to do so. It will not be reformed because it would put government finances on a sound footing, nor to restrain war-making. Stabilizing the dollar won’t do it either. The current monetary system (or as James Grant calls it, non-system) will be replaced, eventually, because it will fail, catastrophically.
What will the alternative to the current regime of central banks, floating exchange rates, and unbacked fiat money look like? Here I must reject the wishful thinking that “things need to get worse so people will be really angry and insist on something better”. Things do not necessarily get better when there is a crisis. Things can get worse and stay worse, or get worse and then go even further downhill.
What exactly Steve Forbes has in mind is nebulous because the term “gold standard” is used differently by different people. The most conventional definition is a system of national currencies exchanging at fixed rates, with central banks, each one having some gold as a reserve asset. In this world, central banks are obligated to provide a form of convertibility, though reserves held may be less than 100%. Individual nations may, under some conditions, be able to devalue their own national currency relative to the fixed rates and to gold.
For adherents to Murray Rothbard’s theory of banking, the gold standard means gold as money proper with banks holding 100% reserves against demand deposits. Under these conditions there is no necessity or even any purpose to having a central bank and devaluation is a form of default.
What does Forbes have in mind? He has been associated with supply side economics , who have their own so-called "gold standard". So-called because it is not much of a gold standard at all, only a rule that the central bank is supposed to manage the inflation of the fiat money system in line with the gold price.
Under this system, gold is not money proper, it is a good whose price is considered the best indicator of the looseness or tightness of monetary policy. As Frank Shostak points out, this system offers none of the advantages of using real gold as money. And why should anyone expect that when push comes to shove, the Fed will follow any rule when the situation seems to demand improvements?
As Murray Rothbard wrote in his critique of a similar money supply growth rule advocated by Milton Friedman, "Of course, Friedman would then advise the Fed to use that absolute power wisely, but no libertarian worth the name can have anything but contempt for the very idea of vesting coercive power in any group and then hoping that such group will not use its power to the utmost."
When the current system fails, there are two primary barriers to the adoption of a better system. The first is the political actors who moved to abandon the gold standard the first time around haven't gone away. The vested interest of powerful groups who wish to use the fiat money printing press are still around; if a new opening appears, the usual suspects will apply for their jobs back. That which has not killed them has made them stronger.
But the deeper obstacle is ideology. Most economists and central bankers actually believe that a) an economy cannot grow without an increasing quantity of money, b) the gold standard caused the Great Depression, c) The Fed determines monetary policy, a necessary and beneficial function and, d) the banking system needs a lender of last resort in the case of financial crises, you know, those crises that just sort of happen, that come out of no-where with no warning and hit us when we least expect.
None of the preceding propositions are true, but as long as they are accepted factoids, the next monetary system is likely to look a lot more like the current one with extra lipstick than anything that existed in the 19th century.
Reader Comments (9)
So, where in your opinion does that leave the role of precious metals and their future value after the current system implodes?
The Kondratieff Winter has been deepening for years, through expanding government debt which can never be repaid. We have a bunch of Peter-Pan's at the Fed. leading us into a Black-Hole called Never-Never Land, Expanding debt, with expanding interest on that debt is making the system unservicable, and redundant. Just like the lemmings, as in Gordon Brown, who follow Keynes over the precipice. I have been saying for years (on record) that the only way out is to re-value gold. But this is too simple for the warped minds of the I.M.F. whose ostrich-like mentality will never listen to simple reasoning. A simple re-valuation of gold would 'cut the crap', lifting us out of this Kondratieff Winter, and give us all a safer platform to prosperity.
steve is very niave to think govmints n central bankers will give up their printing power without a great collapse and vast public uprising.
Elitist Forbes is a con man, and pathetic..... he was at the recent International Chamber of Commerce meeting in Greece, where the elites sat around looking at stealing the assets from the people of Greece.
The assets of Greece belong to the people, not international banksters and other thieves like Forbes.
So he is part of the problem, not the solution....Marc
In your article you have a section
" Most economists and central bankers actually believe that a) an economy cannot grow without an increasing quantity of money"
That brings to mind the assertions I've read that under our present system of debt-based-money, Debt HAS to grow to account for the necessary Interest required by the system. In other words, 'Money' is borrowed into existence but not the Interest to pay it back. Thus to obtain the funds for paying back the Interest our Debt based system has to expand, ponzi-like. More Debt/Money is always required. Like a shark needs water flowing past its gills to breath, our debt based system needs to grow. Otherwise it dies.
Jeff I'd love to hear you thoughts concerning this.
It seems true to me but perhaps I am missing something and that something shoots holes in the theory.
I find rational ignorance to be mildly compelling, but I don't think it tells the whole story. I just read an interesting book "The Myth of the Rational Voter" by Bryan Caplan. He introduces a competing (though in some ways complementary) theory called rational irrationality, which is simply the notion that people rationally value their ideology more than they value the effect that their vote has since, statistically, the effect of their vote is near zero. Hence people support policies that make them feel good but are clearly destructive -- minimum wage, protectionism, heavy welfare to name a few.
I find rational irrationality to be somewhat compelling in this case because there are plenty of people who have an opinion on the matter of the gold standard, and who definitely want to have a "man behind the curtain" (the Fed chairman) who they think is running the economy and who can ride in to the rescue when things take a turn for the worst.
Since the people in charge of the economy don't want a gold standard, the rationally irrational voter won't want a gold standard either. The voters will put full faith in the Fed despite the role the Fed has played in the mismanagement of the monetary and financial state of the country, and no gold standard will be put into place.
Wener above writes "So, where in your opinion does that leave the role of precious metals and their future value after the current system implodes?". If the world were to use gold as money proper in place of all the fiat monies, it would have to have a purchasing power in the $5,000-to-$10,000 per ounce range, in relation to the current value of 1 USD. I'm not suggesting that this will happen. What gold and silver are worth after the current system implodes depends on what it gets replaced with.
Jack above writes: "That brings to mind the assertions I've read that under our present system of debt-based-money, Debt HAS to grow to account for the necessary Interest required by the system. In other words, 'Money' is borrowed into existence but not the Interest to pay it back. Thus to obtain the funds for paying back the Interest our Debt based system has to expand, ponzi-like. More Debt/Money is always required. Like a shark needs water flowing past its gills to breath, our debt based system needs to grow. Otherwise it dies."
It's not clear to me that this has to be true. Consider a society that uses gold as money with no fractional reserve banks - meaning, no debt-based money. On day 1 there is no debt. On day 2, various people make loans to other people. Can these loans be repaid without the money supply increasing? Of course. The loans are paid back out of the future incomes or earnings of the borrowers. As long as the debts stay in line with the earning power of the borrowers, they can be paid back. The argument about more money being required to pay off debt compares two things that aren't relevant: the present amount of debt and the present money supply. Debt is paid out of future cash flows, which depend on the money supply, and money demand, which in turn depends on the extent of economic activity. The argument also does not take into account the term of the debt or the interest rate. I wouldn't see a problem, necessarily, with a society in which homes are purchased with 20% down, 80% debt on long-term loans.
So while it is probably true that there is a threshold where there is so much debt that realistically it's not going to get paid, it can only default or be inflated away. But I think that the argument as presented proves too much.
This is a great article.
Thank you Mr. Blumen.
Honestly, the populace will turn to gold when there is no alternative.
I for one think that day is now, but every alternative will be used until it demonstrably fails, leaving only gold as a reliable store of value. That is not necessarily an economic collapse scenario, but much "deconstruction" will be inevitable until a rational system is again established.
"I'm not necessarily sold on "doomsday," by the way. The evolution of robotics heralds dramatic near-future increases in productivity, and molecular biology is moving nearer primary prevention of disease. A lot of things are going to get better despite the monetary system's spinning out of control. Protection of private property will be a minimum requirement for "recovery."