More on the Gold Standard
Not too much in the way of pathbreaking theory here for the old veterans, but you might add these to your rhetorical arsenal:
One of the most absurd objections to returning to a gold standard is that “You can’t eat gold.” I am not making this up; Dave Leonhardt of the New York Times actually said that to Ron Paul when he defended the idea on the Colbert Report.
Dr. Paul didn’t really get a chance to answer (Colbert instead made a funny joke about idolatry), but it would have been delicious had he quickly asked the cynic, “Oh, so you make sandwiches out of Federal Reserve notes?” (We also would have accepted, “Oh, so I take it you are proposing a hamburger standard for the dollar?”)
Actually, I did get into some deep thoughts at the end, provoked by Blackadder from the comments in an earlier blog post:
Finally, a critic could (and actually did, on my blog) ask how this arrangement [of the gold price not being a price control] differs from the current one? After all, right now Bernanke “sets” interest rates, but not through literal price controls. Instead, the Fed adjusts the quantity of reserves in the banking sector such that the “market-determined” federal funds rate is close enough to the Fed’s target for this interest rate. So isn’t this basically the same thing as the gold standard, with a different “good” serving as the monetary commodity?
There are two problems with this sophisticated objection. First, in the current system the Fed has a moving federal-funds target. At best, then, it would be analogous only if the Federal Open Market Committee said after each meeting, “We are now setting the target price of gold at such-and-such dollars. However, if unemployment begins rising and core CPI is under 2 percent, we will begin raising the target price of gold in $10 increments over the next few meetings.” That system would be nothing like the classical gold standard.
Yet the deeper problem with the analogy is that on a classical gold standard, the government is (imperfectly) mimicking what would happen if the money were actually gold, with people walking around with gold coins in their pockets, and merchants quoting prices not in dollars but in grains or ounces of gold. The classical gold standard, by fixing the dollar as convertible into a definite and constant weight of gold, doesn’t introduce another price: the dollar is supposed to be a claim-ticket to gold. This isn’t really “price fixing,” any more than defining a foot as 12 inches is “central planning.”
In contrast, what would be the free-market analog of the Fed’s current strategy of targeting short-term interest rates? The only thing I can think of is if the money commodity in a community weren’t something tangible like gold, silver, or tobacco, but rather overnight bonds issued by banks. Yet what is a bond but a promise to deliver money? So how could the money itself be a short-term bond? At this point I am dropping the analogy, lest I become permanently cross-eyed.
In contrast, what would be the free-market analog of the Fed’s current strategy of targeting short-term interest rates? The only thing I can think of is if the money commodity in a community weren’t something tangible like gold, silver, or tobacco, but rather overnight bonds issued by banks. Yet what is a bond but a promise to deliver money? So how could the money itself be a short-term bond?
Wouldn’t Hayek’s competing currencies idea qualify?
But they would all – or nearly all – be convertible into gold or a precious metal. There has to be a reason for someone to accept a Johnson or Blackadder Note.
Sergio Leone’s “A Fistful of Johnsons’ and “For a Few Johnsons More” just do not sound like movies I’d want to watch.
Someone might accept an unbacked token because it offers better features than prevailing currencies — features like anonymity, ability to send long distances, low transaction costs, decentralzation, and immunity to inflation.
Someone should create such a currency, and perhaps call it “Bitcoin”.
Bitcoins are also convertible into U.S. dollars.
“and immunity to inflation.”
Immunity you say…
http://www.npr.org/blogs/money/2011/06/13/137157430/bitcoin-goes-haywire
Long-term, immunity, yes. How does a brief 30% decline from peak compare to the dollar’s stable 95%+ decline from its zenith?
Taxes will do. I’ll collect them.
I won’t pay taxes to you, dork.
No problem, there is still room in the basement!
FYI – Michael Rozeff has written summaries of the chapters of Vieira’s huge two volume set:
http://www.scribd.com/michael%20s%20rozeff
I note that there are a few sets available on Amazon for only around $200 per set.
I read with interest your essay and defense of a gold standard, but I wonder if it is really implementable outside academia given the state of technology that connects 6 billion people and allows money transactions across the globe in an instant. Below I outline some questions I am left with after reading your piece.
. What is money but a means of exchange? Thus a bond is money as much as a certificate promising gold is. Gold has only limited usefulness other than its promise to be exchangeable for goods or money.
The argument that gold cannot be printed is valid only to the extent that governments will not be persuaded to change the fix ratio to the currency, a policy decision. Couldn’t the same be accomplished by pad-locking the printing presses? And isn’t monetary policy ultimately dictated by fiscal overreach, rather than the other way ‘round – without the trillion dollar deficits there would not be a need for the Fed expanding the money supply? Isn’t that really the root of the problem and not whether money aka promises are made from paper or gold?
We seem to be saying we cannot trust our government/the Fed, hence we curtail their power with gold? Only who is going to be in charge of the gold, the very same government we don’t trust. That solves the problem???
Notes
[1] “If the market price of gold ever went above $2,000, therefore, speculators could earn arbitrage profits by buying from Uncle Sam at $2,000 and reselling gold in the market for more.”
Wasn’t that exactly what caused the run on Fort Knox and forced severance of the final link in 1971? Do you want speculators like Soros and Paulson determine the monetary policy to suit their personal gain? They could drive up the price of gold forcing the money stock to shrink and bring about deflation and depression.
Where am I going wrong with this analysis?