The fact that Newt Gingrich has picked up the gold standard issue in his quest for the nomination has provoked a bit of a reaction. You can safely ignore the 'unelectable' guy after all, but Gingrich is apparently still (wrongly, we believe) thought of as a contender.
Floyd Norris has written an article at the NYT discussing the subject. It has its share of unintentionally funny moments. To be sure, Norris starts out with an observation with which we agree:
“Mr. Gingrich, it should be noted, did not promise to support a gold standard, only to appoint a commission. If he is serious about following Mr. Reagan’s precedent, there may be little chance of a move to gold even if Mr. Gingrich does win the Republican nomination and the November election. In office, Mr. Reagan showed no inclination to buck the collected wisdom of most economists, whether Keynesian or monetarist.”
Bingo. However, Norris also notes that the people Gingrich proposes as co-chairs of the commission this time around would in fact be supporters of a gold standard – Jim Grant and Lewis Lehrman (along with Ron Paul, Lehrman was the only pro-gold voice in Reagan's commission). If so, he may be more serious about it than we are giving him credit for. Color us highly doubtful anyway.
After these introductory remarks, we learn why it's allegedly a bad idea:
“More than almost any other dispute in economics, gold often seems to be a matter of theology. To supporters, gold has been money for thousands of years, and a return to it is the only way to keep politicians from debasing currencies.”
Let us look at this in more detail. 'It's a matter of theology' – not really. It may appear so to outside observers, but it is really a matter of economic reasoning.
Gold has been money for thousands of years not only to 'its supporters'. It has been regarded and served as money for thousands of years, period. Suitable media of exchange emerge in the market economy by a process of trial and error, until the most marketable and otherwise suitable commodity remains as the major medium exchange. Whether it is the only way to keep politicians (and bureaucrats) from debasing the currency is not even open for discussion. Obviously no-one can print gold, but they sure can print wagon-loads of funny money or create its electronic equivalent. They can and they do.
“To most current economists, gold is a commodity, subject to the normal fluctuations of supply and demand. To them, the supply of money should be controlled based on economic principles. With a gold standard, the amount of gold available to back money could grow only at the same rate that gold stocks increased, something that depends on mining successes, not on the needs of an economy.”
Well, if the first sentence is actually true – i.e., if that actually represents what 'most current economists are thinking', then they are simply wrong. The way we understand this sentence is that it is meant to convey that gold is a commodity like any other, similar to say, copper. This can not be the case, since gold is never consumed. The fact that gold has by far the highest stock to flow ratio of all commodities and still commands an extremely high price in terms of fiat money proves ipso facto that there exists a monetary demand for it.
Whose 'economic principles' have decreed that the 'money supply should be controlled'? Controlled by whom? In actual practice, it is controlled by a gaggle of bureaucrats and an ancillary fractionally reserved banking cartel. As noted above, they have abused this privilege often and in great measure. The outcome has been less than optimal, similar to all other economic central planning endeavors in history.
The whole point of a gold standard is that the money supply could no longer be increased willy-nilly. The idea that the 'economy needs a flexible money supply' (in actual reality, one that is growing extremely fast) is mistaken. Money is the only good which conveys no social gains whatsoever if its supply is increased (or to be more precise: it benefits a small minority to the detriment of the vast majority). Any 'needs' the market economy has with regards to a variable rate of money supply growth could indeed be satisfied by gold mining. The difference would be that the market would determine the rate of money supply growth, as opposed to a central planning agency.
Now we come to the article's 'laugh out loud' moments:
“The University of Chicago last month asked a panel of 40 economists, including former advisers to both Democratic and Republican presidents, if they agreed that “price-stability and employment outcomes would be better for the average American” if the dollar’s value were tied to gold. Every one of them disagreed, some with more than a little incredulity that such a question was worthy of discussion.”
This is easily one of the strongest arguments in favor of a gold standard we have heard in a great many years. Forty modern-day economists being unanimous in rejecting the gold standard is as good as an ironclad guarantee that it would be highly desirable to adopt it as quickly as possible.
It becomes even funnier:
“Why tie to gold?” asked Richard Thaler, a University of Chicago professor. “Why not 1982 Bordeaux?”
Hmmm…let's think about this for a moment. Maybe it's because 1982 Bordeaux is not useful as a medium of exchange and has never been selected by the market as such? A professor of economics is unaware of this? Admittedly the question does deserve some consideration. As far as we are concerned the main issue is actually not whether we should return to a gold standard. In fact, experience shows that governments can under no circumstances be trusted with running a gold standard – it would very likely not endure.
The real issue is whether money should be left to the free market or 'controlled and planned' by a government agency. Funny enough, Chicago school economists regard the market as superior in almost every respect to government meddling. Only money is somehow excepted. No good reason has ever been forwarded for this (various reasons have of course been forwarded, but no good ones).
“Eesh,” responded Austan Goolsbee, a Chicago colleague and former adviser to President Obama. “Has it come to this?”
We thank Mr. Goolsbee for his highly qualified remark. He's of course a quintessential establishment figure, as his CV reveals – the prototypical 'intellectual in the service of the State'. As Hans-Hermann Hoppe so perceptively writes of this class:
“There are almost no economists, philosophers, historians, or social theorists of rank employed privately by members of the natural elite. And those few of the old elite who remain and who might have purchased their services can no longer afford intellectuals financially. Instead, intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.”
What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the State, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.
(emphasis added)
It should be obvious that the monetary system lies at the root of State control over the economy; with honest money, the State would by necessity shrink. We can not expect any of these people to bite the hand that feeds them, which they would do if they advocated a truly free unhampered market economy (this is to say, an economy where money is chosen by the market).
Norris' article continues by noting that even economists allegedly 'sympathetic to gold' reject a gold standard:
“Even economists with some sympathy to gold opposed the idea. “The gold standard adds credibility when a country lacks discipline,” said Edward Lazear of Stanford, who served as chairman of the Council of Economic Advisers under President George W. Bush. “The cost is monetary policy flexibility. The trade-off is unclear in the U.S.”
Ending 'monetary flexibility' would not be a 'cost', it would be an enormous gain. Let us see – since January 2008, the true broad US money supply has increased by nearly 75%. There is now 75% more money in the economy than a scant four years ago. The government's deficit has grown from .5 trillion to over trillion over the same span. It is already certain that it will exceed trillion before the year is out. Does anyone think that the country might 'lack discipline'?
Floyd then presents the kind of ex-post reasoning that has been routinely applied as the justification for the above facts:
“It is no coincidence that gold is back as an issue now, more than 30 years after its last significant appearance in presidential politics. It was the vanquishing of inflation by the Federal Reserve in the early 1980s under Paul A. Volcker that led to a collapse in the price of the precious metal and to the widespread belief in the wisdom of central bankers.
That reputation suffered badly in recent years. There is little doubt that the Fed, under Alan Greenspan, helped bring on the housing bubble through a combination of easy money and loose regulation of banks. But to most economists, the fact that central banks can err does not prove they should be replaced by an inflexible gold-based regime, which many think contributed to the Great Depression.
“A gold standard would have avoided the policy mistakes of the 2000s,” conceded Daron Acemoglu of M.I.T. in his response to the Chicago survey. But, he added, “discretionary policy is useful during recessions.”
(emphasis added)
So let's get this straight: a gold standard would have 'avoided the policy mistakes of the 2000s', but we can still not forego the discretionary policies that are so 'useful during recessions'.
In other words, not having a gold standard has produced the current sorry state of affairs. Given the current sorry state of affairs, we unfortunately can not afford to have a gold standard. This kind of circular reasoning is characteristic for a lot of the collectivist nonsense we have to put up with.
It should be noted here that recessions don't fall out of the sky. The current economic mainstream makes as though recessions were akin to natural catastrophes. One day, everything is fine, the next day highly indebted borrowers suddenly lose their 'animal spirits', and presto, an economic downturn ensues.
They must all have listened to an inner voice that has told them this – since as a rule no other more credible explanation is forwarded (admittedly there exists a variation of the argument since 2009 that is even less credible: 'we didn't have enough regulations').
The error here is of course the widespread belief that a committee of well-intentioned bureaucrats can improve the market economy by means of interventions. Recessions are some sort of illness that is inherent in the market economy in this view, requiring the intercession of 'potent directors'. When these interventions predictably not only fail to produce the desired result but produce its exact opposite, this is not held to represent proof that we'd be better off without interventionism in the first place. It is held to prove that more of the same is required, only in even greater quantities than last time around.
What else can be concluded from the facts? When the Nasdaq bubble collapsed, it was argued that Greenspan needed to 'create some other bubble to replace it' (Paul McCulley and Paul Krugman were especially vocal regarding the need to 'create a housing bubble'). He complied and we can all see the end result. It should be clear that society as a whole would be better off if no committee of central planners held such power. Some of the economists polled probably really don't know any better, but we wager that a great many are driven by their personal motives: in a free market economy, only the services of the best would be paid for, and the pay would probably be considerably less than it is today.
As to the gold standard, we reiterate that it does not matter whether gold or another, more suitable medium of exchange is picked by the market. It stands to reason however that by dint of thousands of years of experience, gold would probably play a big role in a free market monetary dispensation.
