Stubborn Irony C2 - Anti-America Conservatism

I find it ironic that some who like to think of themselves as “conservative patriots” are advocates of a system that would export the control of our nation’s money system to foreigners.

[This is article 1 of 3 in this week’s portion of my nonpartisan “Ironies” series, a diverse array of criticisms, distributed evenly and fairly among an inclusive list of ideologies—liberal, conservative, and nondenominational—to achieve my Diversity and Inclusion goals for 2007.]

Hey, I like gold coins just as much as the next person; they’re shiny, they don’t tarnish, the artwork is beautiful, and they just feel valuable sitting there in my hand.  But that does not mean that I think the gold standard would be a good basis for our monetary system.  I think it’s a really bad idea.  That irritates some who think of themselves as conservative, or patriotic, or fiscally responsible—and there are more than a few politicians in that group. 

Although I haven’t found many economists, of any ideology, who think the gold standard is a good idea for today’s economy, I have seen internet forum after internet forum packed with participants who do.  Even though most economists understand both the economic inadvisability and the political impossibility of a return to the gold standard, that message hasn’t yet reached the status of common knowledge.  With this article, I’m giving that message a boost, I hope.

I assume we can all agree that inflation is undesirable, regardless of what we’re using for “money”: paper, seashells, cows, cow patties, whale teeth, or gold coins.  When it takes more “money” next year than this year to buy bread of equal quality (in equal supply and equal demand), “money” has lost some of its value.  That’s inflation, and it’s undesirable because it means money is not maintaining a stable value for economic transactions.  [By the same token, deflation is just as undesirable, for the very same reason.] 

Money that maintains a stable, predictable value is the goal, because that eliminates one complicating variable for people exchanging real goods and services. 

So what’s wrong with a dollar that’s tied to gold, instead of today’s dollar that’s tied to nothing but the federal government’s decree?  After all, with mere “fiat money” won’t the government (as history has demonstrated) eventually turn up the printing presses to inflate its way out of the debt, or to gain the illusion of higher tax revenue without having to raise taxes?  Wouldn’t tying the dollar to gold protect the value of the dollar? 

Well, the best answer to that might be a thought experiment:

Assume we were on the gold standard today.  What if science all of a sudden came up with a new technology that flooded the market with gold—say, a high-volume nanoscale process that extracted gold from seawater at a cost of a nickel per ton of gold? 

Answer: That would be the gold equivalent of cranking up the printing presses and flooding the market with paper dollars. 

Here’s how Dr. Rick Boettger chose to convey the same idea (in his book The Deficit Lie—one of the most entertaining economics books I’ve ever read and re-read):

Using gold to back up money is like using old poker chips to back up new ones.  Gold is nothing but an old-fashioned form of money.

Now for a more-realistic angle on that same thought experiment:

Assume we were on the gold standard today—even though 90% of the world’s gold is produced by foreigners, and even though a significant portion of the known gold deposits are controlled by Russian and South African goldmine owners.  What if the Russian, South African, and other goldmine owners, colluding with their political leaders, decided their countries could deal the US economy a big blow—thereby gaining a significant relative advantage in international trade and power—if they restricted or cutoff their gold production?  How would our gold-standard economy respond to a “Gold Embargo”? 

More importantly: Why expose our monetary system to the ups and downs and lags of world gold production?  Why invite "monetary shocks" that would precipitate excessive inflations or deflationary recessions?  Why not leave the control of our currency’s stability—our paper “fiat” currency—in the hands of Americans?  Wouldn’t that be better than ceding control to Russian or South African goldmine owners?  After all, as this Cato article pointed out:

...no country has ever been able to maintain a gold standard . . . gold's value [as money] derives from its long history as a store of value and is wrongly assumed to be intrinsic.

I’m with most economists: control of America’s monetary system belongs with Americans.  Today, that’s the Fed Board of Governors.  Hey, they aren’t perfect; they’ve made some pretty bad mistakes in the past.  Not only that, but there are some people (e.g., see the Cato article above) who think the Fed’s job could be quasi-automated.  Nonetheless, the Fed Board of Governors is in control now—and it is a group of Americans with a clear objective of keeping US dollar inflation low and under control.   

Summary
Ironically, the gold standard is anti-American.  Paper “fiat” money—money that’s money just because the government says it’s money and everybody accepts it as money—is better than gold.  

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End note:
I’m sure I’ll be hearing from Fed Conspiracy Theory fans about this post.  If you know anyone who’s convinced the Fed is the result of a secret conspiracy by name-your-favorite-villains, then here are two papers you should tell them to read in full before they start submitting comments here:

• Debunking the Federal Reserve Conspiracy Theories

• Money and the Federal Reserve System: Myth and Reality

Comments

[Mason6883]

Regarding the ups and downs of gold, I bought a gold ring for my girlfriend in 2003 for $100. We are now married, and I just got the ring resized a few months ago. The price of gold has risen so much in that time that the resizing cost $60.

[Jon Thompson]

The economists who supported the gold standard were already ancient when they died over a decade back. Off the top of my head, Rothbard and Mises are all I can think of.

Hayek, and obviously Friedman, had lots of ideas about macroeconomic stability and systems. Toward the end, Hayek believed in free banking, in which there is no lender of last resort, and private banks issue currency. I still support that idea.

However, the gold standard is just bunk. Because, by a chance of history, the value of the dollar, pegged to gold, was about the same in 1915 as it was in 1789, people think that that means it was stable, when it fact it fluctuated, with inflation for 80 years and deflation for 40.

I can see wanting to take control away from the Fed, given their history. But, why not a constant monetary expansion, of, say, M2 by 5% a year? Why keep money powers in the hands of government, and then use the stupidest imaginable backing?

[Steve]

Jon,

You're right about the economists; the gold standard is a dinosaur fossil to almost all of them. But it's been more than a generation, and the idea still has legs with others who should know better by now.

Regarding the 5% (or 4%) rule, here's my problem with it: If the real economy only grows at 1%, we'd have inflation; if the real economy could grow at 9% if only money grew at 9%, we'd have deflation, and the upside-down situation of money growth stifling real growth. That's why I prefer the inflation target of 1-2%. Besides, the money supply is difficult or impossible to measure -- which makes the MV=PT equation an educational thought-provoker, but unusable as a policy tool. I'd rather see us fund a large effort to get better at measuring inflation, which I think is still overstated by about ½-point if not more.

[Mike Hinton]

Steve,

I wonder if you could clear something up for me. You raise a good point about the gold owners taking control of our money supply. They could mess with our currency even if it wasn't in their best interest.

Some people are afraid something similar will happen with the Chinese buying a lot of our bonds; they're afraid they will try to damage our country by selling most of their bonds someday. Could you explain why this is so unlikely to happen? Is it because they would hurt themselves far more that the gold miners, or is their percentage of the debt they hold just too small for them to have any real impact? Thanks for the help; I have trouble coming up with the best reasons sometimes.

Oh, and thanks for those articles on the federal reserve, I’ll forward them to this believer I know, though I doubt it will have much impact no matter how convincing they are, it’s basically a religion for him.

[Stephen Reed]

Steve,

Excellent entry. I get into discussions with these gold standard cranks every once in awhile who think the FED is some sort of private bankers cartel and of course recommend a return to the gold standard. Incredible considering the relative monetary and economic stability we've had the past 25 years. Your entry definitely gives me a few more topics to discuss about the pitfalls of a gold standard.

[Steve]

Mike,

Regarding the possibility that the Chinese will decide to become financial suicide-bombers, here are two articles I recommend:
http://www.townhall.com/columnists/AlanReynolds/2005/05/12/doomsday_is_doomed
http://www.optimist123.com/optimist/2006/09/foreign_buyers_.html

Steve

[Valens342]

A friend of mine that worked for that small company Rio Tinto once remarked to me that the majority of all the gold in the world had already been mined and sat in vaults. Therefore, the price of gold is, of course, artificial, just like diamonds. If a country should need a few quick bucks, liquiditating portions of its gold supply works like a charm, with the corresponding effect of plumetting gold prices. It has happened before...

[Jon Thompson]

Steve-
There are lots of problems with the 5% rule. Considering that the Fed has actually been great for over twenty years at ignoring political pressures, I don't think it is worth it, all things considered.

Still, in case of slow growth, the monetary growth acts as a monetary stimulus, and in the case of rapid growth...well, growth over 5% in real terms is pretty unlikely these days, sadly.

The real problem is th one we have with any fiat system. All of our measures of money, and, as you note, inflation, are questionable. As I've said, I think the best measure of monetary expansion is our exchange rate, which does make me worry a bit at the present day.

[R]

That poker chips quote summarizes it nicely. The gold nuts never seem to realize that gold was a fiat currency too.

[Kevin]

I've never understood the conservatives' fetish for gold. They simply do not understand what money is, and that includes any and all PhD economists who support a gold standard.

Gold is not money and money is not gold; money is in truth an abstract thing not tied to material commodities (whether people want to accept the fact or not), and by practice in the last century we've come closer and closer to understanding that.