The Gold Standard of Lunacy

The gold stan­dard is com­ing back in a a big way. Not only do a num­ber of recently elected con­gress­man and Sen­a­tors favor a return to the gold stan­dard: the Pres­i­dent of the World Bank recently ini­ti­ated a con­ver­sa­tion about return­ing to gold, and the New York Times recently ran an edito­r­ial by James Grant on the urgent need to bring gold back. Fox News has guests argu­ing that return to gold is already hap­pen­ing. Right wing TV and radio adver­tis­ers con­stantly pro­mote gold as a hedge against the com­ing dis­as­ter. A Ger­man com­pany is appar­ently mak­ing gold vend­ing machines, so that you can insert your credit card and get back a small amount of gold. What you’ll do with one gram gold bars is unclear.

Peo­ple often say that our paper money is “backed by noth­ing,” but this isn’t true at all. It’s backed by our col­lec­tive labors, the “gross national prod­uct;” by the phys­i­cal assets of the United States of Amer­ica, its lands and parks and forests; by its mil­i­tary and its courts, by the rule of law: hardly noth­ing, these count among the great­est achieve­ments in human his­tory. Sol­diers and Marines fight and die for these things every day. To say our money is backed by noth­ing is to say that the United States is nothing.

But  it’s true: you can’t walk into to a bank, present some paper money, and ask for the United States of Amer­ica in return. No sin­gle, tan­gi­ble com­mod­ity backs our money: there’s no gold stan­dard, no sil­ver stan­dard, just paper. And the amount of paper in cir­cu­la­tion varies accord­ing to a bunch of things, includ­ing how the Fed­eral Reserve thinks we are doing.

Peo­ple who like the idea of a gold stan­dard like the idea that gold has “real,” “intrin­sic” value, which is a fancy way of say­ing it just is valu­able, in the same way that lead is heavy. “Value,” they argue, is a prop­erty installed in gold by God or nature. An econ­omy based on gold is thus an econ­omy founded in nat­ural law: gold bugs dream of an econ­omy which gov­ern­ment can’t tam­per with. All val­ues will be “real” val­ues. The gov­ern­ment can’t issue more gold, so it can’t cre­ate debt by sim­ply print­ing more money.

This is mostly true, but most peo­ple stop and think a bit when it’s pointed out the the Rev­o­lu­tion­ary war, the Civil War, and WWII were all financed by print­ing paper money, as was the defeat of the Soviet Union in the Cold War, the con­struc­tion of the Fed­eral High­way sys­tem, the Man­hat­tan Project, the devel­op­ment of the Inter­net, the found­ing of Microsoft-I could go on.

And also, a gold stan­dard would not really stop the mag­i­cal cre­ation of money, unless you’re going to insist on using gold coins only. A bank always lends out more money than it has in its vaults: it has $50,000 in cash, but it lends out $100,000. The bank is “cre­at­ing money” by mak­ing a bet on the cre­ative pow­ers of the peo­ple it lends to, like Jimmy Stew­art in It’s a Won­der­ful Life. A gold stan­dard won’t stop this. And if it did stop it, it would be the end of indus­trial cap­i­tal­ism, which is based entirely on credit, and on cre­at­ing new money by lend­ing. When we get the loan, on good terms, we tend to like credit. When lots of loans default, as in 2008, we tend to think credit is bad and we want “real” val­ues again.

Gold bugs think paper money causes infla­tion not just in the sense of high prices,  but in a gen­eral sense of “soci­ety out of con­trol.” Here’s an inter­est­ing exam­ple, a car­toon by Thomas Nast pub­lished in 1876.

Nast depicts a world gone crazy. In the car­toon paper money, the “rag baby,” amounts to a silly, child­ish delu­sion that denies real­ity. But con­sider the draw­ing of a cow: “this is a cow, by act of the artist.” Paper cows don’t give milk. But a really good draw­ing of a cow could eas­ily be worth more than an actual cow.  And in Chicago, even as Nast worked, traders spec­u­lated in the futures mar­ket, in which hypo­thet­i­cal cows and non-existent bushels of wheat rep­re­sented only by pieces of paper daily made and lost fortunes.

Nast’s draw­ing shows how he wants things to be “real,” to be lit­eral. But the draw­ing itself, noth­ing more than lines on paper, cre­ates value: it expresses real polit­i­cal argu­ments: “this is the gold bug posi­tion, by act of the artist.” Added to a book on money, it increased the book’s value.

Nast is a great exam­ple of how mere marks on paper can cre­ate value. Ask most Amer­i­cans about “Boss” Tweed and a Nast car­toon, recalled from some text­book, springs to mind. Even more, Nast often gets credit for invent­ing Santa Claus: his paper imag­in­ings of the jolly bearded elf-master now sup­port an indus­try that annu­ally gen­er­ates bil­lions of dol­lars: an entirely fic­ti­tious per­son gen­er­at­ing mas­sively real eco­nomic effects. So if Nast’s paper draw­ings can embody Santa Claus, and cre­ate value, why can’t paper money?

The MIT econ­o­mist Frances Walker1 claimed in 1889 that paper money caused not just high prices: it caused bad taste in cloth­ing, it cre­ated both effem­i­nacy and coarse­ness; it under­mined male author­ity: it increased for­eign influ­ence and put the wrong sort of peo­ple in charge.

I need not recall the wan­ton brav­ery of apparel and equipage; the cre­ation of a count­less host of arti­fi­cial neces­si­ties in the fam­ily beyond the power of the hus­band and Father to supply…the humil­i­at­ing imi­ta­tions of for­eign habits of living…the loss of that fit and nat­ural lead­er­ship of taste and fashion.

All this caused by paper money! Clearly what was at stake was more than just prices.

When you see argu­ments for the gold stan­dard, look how often they are linked to a sense of gen­eral derange­ment in social affairs, or apoca­lyp­tic argu­ments about col­lapse and degen­er­acy. It is cer­tainly true that hyper­in­fla­tion, a con­di­tion where prices spi­ral upward out of con­trol, is a dis­as­ter. But when the osten­si­bly rea­son­able James Grant, writ­ing in the New York Times, praises gold for its “its util­ity, econ­omy and ele­gance,” and warns that paper money will cause “wall-to-wall Euro­pean tourists on the side­walks of Man­hat­tan” some­thing besides the price of eggs is at stake.

The gold stan­dard has never pre­vented eco­nomic boom and bust cycles, and in never can, because there is no “real” price, and value is not a thing, it’s a process. You often hear eco­nomic ana­lysts or jour­nal­ists talk­ing about a “mar­ket cor­rec­tion,” as if mar­ket made some mis­take and got back to the “cor­rect” price; or the guys on NPR’s Mar­ket­place talk­ing about stocks being “over­val­ued.” Nei­ther of these terms make any sense: the value or price is sim­ply what peo­ple are will­ing to pay, and that changes with time and cir­cum­stance. There is no “real” price.

It’s com­fort­ing to believe there is: hence the endur­ing fan­tasy of the gold stan­dard. Slate ran a good piece on what would hap­pen if we returned to the gold stan­dard. You can add to that rapid defla­tion and spikes in inter­est rates. Defla­tion sounds good, except that inter­est rates would spike while the prices man­u­fac­tur­ers and busi­nesses could get for their goods would col­lapse. Defla­tion was pre­cisely the prob­lem in 1932. But one set of peo­ple would ben­e­fit to a remark­able degree, and that is, those who hold cap­i­tal, e.g the rich.  The value of their money would sky­rocket, as would the price they could demand for lend­ing it.

So when you see argu­ments for the gold stan­dard look for the obiter dicta, the rhetor­i­cal flour­ishes used to make the argu­ment. And con­sider who stands to gain the most by a return to the favored scheme of Gilded Age rob­ber barons.

Update: More on gold language


  1.   Walker was a big deal in his day–a jour­nal­ist and influ­en­tial pro­fes­sor, he also served as super­vi­sor of the cen­sus, where he argued we should pre­vent the immi­gra­tion of “low wage races.”

32 Comments

  • Love it when you talk about the gold stan­dard, Mike. One of the other unfor­tu­nate char­ac­ter­is­tics of the gold stan­dard is its inflex­i­bil­ity. When times are good the gold stan­dard behaves; when times are bad, it is very obdu­rate, and gov­ern­ments have lit­tle wig­gle room. Liaquat Ahmed in Lords of Finance has the best dis­cus­sion of the gold stan­dard that I’ve read in a long time. As you point point out, the gold stan­dard is an endur­ing fantasy.

  • If there were a gold stan­dard then the money sup­ply would cease to be linked to the state of the economy.

    Instead it would be largely at the mercy of oth­ers who chose to hoard gold as France appar­ently did dur­ing the great Depres­sion appar­ently by set­ting its exchange rate too low.

    http://blogs.reuters.com/macroscope/2010/11/01/did-france-cause-the-great-depression/

    Any­one care to guess how much gold would be left out­side of China by year-end if we read­opted the gold standard?

  • to the printers ever bad debt is a nail wrote:

    Why gold is bet­ter than cash

    The rea­son these indi­vid­u­als hoard pre­cious met­als is the basic hypoth­e­sis of this arti­cle: they will dishoard gold when paper money stops los­ing its value. We should there­fore con­sider the extent and speed of this loss. In 1973 there were US$1,120 of demand deposits plus cash cur­rency for every ounce of gold owned by the US government[i]. Today, includ­ing excess reserves held at the Fed and the $600bn to be printed over the next seven months, the fig­ure stands at $26,512[ii]. In 1973 there were twelve times as many dol­lars as there was gold at the mar­ket price, com­pared with nearly 20 times today, so paper dol­lars are more over­val­ued in gold terms today than at the time when the gold price was only $100.

    This analy­sis may turn out to be unfor­tu­nately right, or hope­fully wrong; but it is more right today than it was last month and also pro­gres­sively so for the months before that. The ris­ing inter­est in pre­cious met­als is entirely con­sis­tent with the grow­ing like­li­hood that the print­ing of fiat cur­ren­cies will con­tinue to accel­er­ate in order to buy off default. While the trans­la­tion of mon­e­tary infla­tion into price infla­tion is rarely an even result, we know from both eco­nom­ics and the expe­ri­ence of his­tory that the two are linked as cause and effect respec­tively. So we can con­clude that paper money will con­tinue to lose its value for the fore­see­able future.

    http://www.financeandeconomics.org/Articles%20archive/2010.11.22%20gold%20and%20cash.htm

  • The dol­lar is de facto backed by oil, since oil is priced in dol­lars. His­tor­i­cally, gold is a won­drous and even mag­i­cal safe­guard for wealth, because it’s fun­gi­ble. How­ever, you can­not put it into your gas tank or eat it. We’re in an eco­log­i­cally rooted sus­tain­abil­ity cri­sis which man­i­fests in fis­cal, finan­cial and eco­nomic dimen­sions –pri­mar­ily the expo­sure of Ponzi schemes no longer viable in a con­tract­ing economy.

  • Thank you for these com­ments. It seems to me that there’s noth­ing new or sur­pris­ing about the price of com­modi­ties fluc­tu­at­ing rel­a­tive to the dollar–commodities would fluc­tu­ate in price rel­a­tive to gold. What I find inter­est­ing is the apoc­a­lyp­tic rhetoric and the way eco­nom­ics as a dis­ci­pline both casts itself as objec­tive and ratio­nal and keeps incor­po­rat­ing the rhetoric of loom­ing cri­sis and social collapse.

  • Keating Willcox wrote:

    Indi­vid­u­als can choose to live on a gold stan­dard, sim­ply by con­vert­ing most of their invest­ments into gold bul­lion and keep­ing it in a safe deposit box. A choice to do so would have made great sense in Poland, Argentina, Bolivia, and Zim­babwe in recent years. Just as these coun­tries just let the print­ing presses run, the US dol­lar will have the same prob­lem unless we change our direction.

    Ask any­one in those four coun­tries if dur­ing their infla­tion they would rather own Gold or bil­lions of worth­less paper cur­rency. And remem­ber that there was a time not so long ago when a $20 bought a gold coin of one ounce.

    Credit can hap­pen with a gold backed cur­rency. You just can’t invent money out of thin air as we do now. Credit is sim­ply how folks with money to invest make more money by loan­ing it out.

  • Your argu­ments are hyper­bolic, inco­her­ent and incomplete.

    1) you fail to demon­strate that under a gold stan­dard money can lose its value as rapidly as under a fiat sys­tem.
    For exam­ple, the Romans padded gold coins with other mate­ri­als, but in mod­ern times they can’t fool us like that. Are there other ways to fool us per­haps? I can’t find any. Can you? Please show us ONE exam­ple of when money lost TONS of value Wiemar-style under a true gold stan­dard system.

    2) you claim that the dol­lar is backed by our labor, land, laws etc. Wrong and inco­her­ent. Exam­ple: If the Chi­nese want to sell off their trea­suries and buy our labor/assets with the pro­ceeds, they can buy our equi­ties, our land, etc. So what price will they pay? If we owe them a tril­lion dol­lars they can buy a tril­lion dol­lars worth of assets. BUT if we inflate the cur­rency by 2x, then the price of every­thing will dou­ble and the same stuff will be val­ued at 2 tril­lion. The Chi­nese will then only be able to buy half of the amount of labor/assets that they could have bought before, so under this sce­nario we screwed them, their claims in our dol­lars were NOT BACKED by these assets and we there­fore lost cred­i­bil­ity. They worked hard to pile up a tril­lion bucks, but now a tril­lion bucks is only worth half of the work. In other words, they worked twice as hard as they thought they would.

    But actu­ally, it’s not even that. There is an even more log­i­cal and direct way to look at this. When they hold a fed­eral reserve note or a trea­sury, they are enti­tled to that NUMBER, One Tril­lion dol­lars, NO MATTER how we manip­u­late our money sup­ply. In other words, when they lend us that money, at the moment of the ORIGINATION of the loan, they already agreed to take on the risk of dilu­tion!! So we didn’t actu­ally exactly screw them, they kind of screwed them­selves. They bear respon­si­bil­ity also. The notes/bills/bonds legally bind the US to pay a spe­cific num­ber of dollars.

    *NOT* a spe­cific acreage of land
    *NOT* a spe­cific num­ber of hours of labor
    *NOT* any­thing! (other than a num­ber of dollars)

    So how can you say that the note is backed by these things??? you are totally and absolutely wrong.

    There is much more wrong with your arti­cle but with these 2 points I think a whole decon­struc­tion can be started.

  • You make my basic point–you are upset that paper money is not “real” and that the values/prices it pro­duces are not sta­ble, and you want gold because you imag­ine it will pro­duce “real” val­ues and prices.

    Our money is clearly backed by the things I described, but of course, the things I described–the cre­ative labors of the US peo­ple, the phys­i­cal assets of the US–are not them­selves fixed in value. They fluc­tu­ate accord­ing to the dame things that cause all other val­ues to fluctuate.

    Isn’t the point of finan­cial nego­ti­a­tion fluc­tu­at­ing prices and val­ues? Wouldn’t price sta­bil­ity equal stag­na­tion? Are you sug­gest­ing that under a gold stan­dard, prices and val­ues would never change, so the tril­lions of dol­lars the Chi­nese spend would always be exactly the same?

    Gold bugs, it seems to me, are all basi­cally mercantilists–the believe that wealth is finite, or they want to believe it, and in that sense there’s an odd anti-capitalist qual­ity to the language.

    Bust, sure, I’m happy to admit that its eas­ier to cause infla­tion with paper money. I already said that.

  • Eyal:

    First you must define what a mon­e­tary sys­tem under a gold stan­dard is.

    If it is actu­ally using the phys­i­cal metal for exchange, then you run into some seri­ous phys­i­cal con­straint issues.

    For exam­ple, spread the total gold sup­ply across all the assets and pro­duc­tive capac­ity in the world today. How much gold are your shoes worth? Or should I say, how many gold atoms are your shoes worth?

    If it using some rep­re­sen­ta­tion, such as cer­tifi­cates — then what­ever author­ity is respon­si­ble for the integrity of those cer­tifi­cates can just as eas­ily inflate the cur­rency as under a fiat currency.

    Any safe­guards you pro­pose to main­tain the integrity of a gold stan­dard sys­tem (audits, etc.), can just as eas­ily be applied to a fiat system.

    The integrity of a mon­e­tary sys­tem is based on pol­i­tics, there is no mag­i­cal sil­ver (or gold) bul­let that will solve this problem.

  • Any safe­guards you pro­pose to main­tain the integrity of a gold stan­dard sys­tem (audits, etc.), can just as eas­ily be applied to a fiat system.

    Haha­ha­ha­ha­ha­ha­ha­hah!

    I won­dered where Alan Greenspan went when he was allowed to wan­der away from assisted liv­ing. Appar­ently he wound up post­ing here!

  • David Jones wrote:

    The real prob­lem is FRACTIONAL RESERVE BANKING and the fact that we allow banks to lend out their deposits 10:1. In truth, most of our TBTF banks are actu­ally lev­ered 100:1. It’s insan­ity and peo­ple who are pro­mot­ing gold are try­ing to restore some dis­ci­pline to an out of con­trol sys­tem. Dol­lar bugs (you like to use the pejo­ra­tive term gold bugs) will soon be able to wall paper their homes with their dol­lars. I’ll keep my gold.

  • Just stum­bled upon this blog. I liked the com­ment about gold bugs being vaguely anti-capitalist.

    I think what they miss is that money must be related to cur­rent pro­duc­tion. Too much and prices go up, too lit­tle and prices go down (and the econ­omy gets sti­fled). There­fore it is intrin­si­cally related to labor.

    When you have the abil­ity to increase pro­duc­tion but can’t increase gold, you get defla­tion, which char­ac­ter­ized much of the U.S. econ­omy between the Civil War and WWI. The pain dur­ing that period was the cause of the cre­ation of the Fed­eral Reserve.

  • Let me respond first with some clar­i­fi­ca­tions that will extin­guish some misunderstandings:

    1 — no I do not believe in actu­ally doing busi­ness in phys­i­cal gold & sil­ver, it would not be effi­cient. I sim­ply believe that the gov­ern­ment notes (or elec­tronic entries) that we use should rep­re­sent a promise to deliver x amount of gold.

    2 — House­Ape, you say: “I think what they miss is that money must be related to cur­rent pro­duc­tion. Too much and prices go up, too lit­tle and prices go down” and mike says “Isn’t the point of finan­cial nego­ti­a­tion fluc­tu­at­ing prices and val­ues? Wouldn’t price sta­bil­ity equal stagnation?”

    This does not char­ac­ter­ize me, nor many other advo­cates of a gold sys­tem. Stag­na­tion is when we don’t have pro­duc­tiv­ity gains or pop­u­la­tion gains or sim­i­lar real growth. Stag­na­tion is the lack of real GDP growth (or let’s say per capita GDP to be more pre­cise). And there­fore the value of gold rel­a­tive to those things will be a fluc­tu­at­ing rela­tion­ship. If I can pro­duce this com­puter cheaper than I used to with the old tech­niques, than this com­puter deserve to sell for cheaper. And so if I pro­duce this com­puter for you, you don’t have to give me as much gold as you used to. On the other hand, if a hur­ri­cane destroys half of the orange groves in the world, you now have to give me more gold (i.e . more U.S. dol­lars, because the dol­lar is pegged to gold) for every orange I deliver. So yes, there are fluc­tu­a­tions. I don’t see the prob­lem here regard­ing the fluc­tu­a­tion issue.

    The value of every­thing has 3 com­po­nents, houses, tulips, sil­ver, labour etc. The buffett/munger way of look­ing at stock mar­ket returns is: infla­tion + real GDP growth + dividends.

    Expand­ing this to all assets, I re-write it as: infla­tion + real growth in the value of the item + cash flows that the item throws off.

    What you talk about is the sec­ond ele­ment, the fluc­tu­a­tion in the value of what we use. I don’t think most gold bugs have a prob­lem with that. Gold bugs have a prob­lem with the first item: infla­tion. But infla­tion is not the only thing that affects prices, and there­fore, even if we have a gold stan­dards, the other two com­po­nents will lead to fluctuations.

  • David Jones wrote:

    Dol­lar bugs, Dol­lar bugs, Dol­lar bugs, just keep accu­mu­lat­ing those dol­lars. After all, we all know that they’re going to be worth more in the future. Since the exis­tence of the Fed the Dol­lar has lost 95% of its pur­chas­ing power. What an amaz­ing track record.

    Oh, and for the record, they’re not really Dol­lars, they’re Fed­eral Reserve Notes. In Ben Bernanke you trust, sheep, baa, baa, baa .…

    Drink some more Fed cool aid Dol­lar bugs!

  • Andrew Bissell wrote:

    When you have the abil­ity to increase pro­duc­tion but can’t increase gold, you get defla­tion, which char­ac­ter­ized much of the U.S. econ­omy between the Civil War and WWI. The pain dur­ing that period was the cause of the cre­ation of the Fed­eral Reserve.”

    This is non­sense. The period between the Civil War and World War I saw the most brisk eco­nomic expan­sion in the country’s his­tory and ris­ing stan­dards of liv­ing for all social classes.

    If paper money is truly such a supe­rior medium of exchange, would you agree to sus­pend­ing legal ten­der laws to allow com­pet­ing cur­ren­cies to arise? (The U.S. gov­ern­ment would still be wel­come to demand Fed­eral Reserve Notes in pay­ment of taxes.)

    Fed­eral Reserve Notes are backed not by assets and labor but by debt, and in fact this is what makes our cur­rent mon­e­tary arrange­ments so per­ni­cious: all money in the econ­omy is cre­ated and off­set by interest-bearing lia­bil­i­ties of the fed­eral gov­ern­ment, which promises to col­lect all of that money back (with inter­est) to repay the Fed. Either a truly sov­er­eign paper money (which is an asset and not a debt to the peo­ple) or gold (also an asset … surely not even the most ardent anti-gold stan­dard types would argue that point) would be supe­rior to the cur­rent pri­vate bank cartel.

  • Andrew Bissell wrote:

    And by the way, if you thought the gold stan­dard could cre­ate crip­pling defla­tion, you ain’t seen noth­ing yet. The totally unmoored credit growth of the past 30 years — impos­si­ble out­side a fiat mon­e­tary sys­tem — has cre­ated the poten­tial for a defla­tion­ary crash like noth­ing that was ever wit­nessed dur­ing the days of the Big Bad Gold Standard.

  • The period from 1870 to 1900 is often called “the great defla­tion:” it was marked by steadily declin­ing prices. This defla­tion was a major rea­son for the Pop­ulist Party and the extremely vio­lent labor strife of the era–the mas­sive, par­a­lyz­ing and vio­lent strikes.

    It’s also true that con­trary to most instances of defla­tion, the period also saw robust eco­nomic growth. It’s anom­alous in oppo­site way of the the 1970s, when there was high infla­tion but lit­tle eco­nomic growth. Both run con­trary to “clas­si­cal models.”

    But few peo­ple alive in 1888 would have been prais­ing the era as a golden age. If you lost the fam­ily farm to defla­tion 1888 the world of 2010 was small comfort.

    It’s true the fed is a weird amal­gam, nei­ther fish nor fowl, and it does not serve ordi­nary peo­ple very well.

  • It’s not clear to me that the mort­gage bond cri­sis had any­thing to do with paper money or that a gold stan­dard would have pre­vented it. Spec­u­la­tive fren­zies depend on expec­ta­tions of increase, not paper. And again I’m not sure how the gold stan­dard pre­vents risky lend­ing: cap­i­tal­ism requires risky lending–lending and risk are at the core of the entire enter­prise, and risk some­times ends badly, and some­times big risks end in big gains.

    We surely might be tee­ter­ing on the edge of the col­lapse of civ­i­liza­tion, or we might not be. The rap­ture could be tonight, or maybe not.

  • davidgmills wrote:

    There sim­ply is not enough gold or sil­ver to go around to have an econ­omy based on the gold or sil­ver stan­dard. Sure fire way to make every­body worth about $500.

    The prob­lem is not with fiat money; the prob­lem is that the issuance of it has been usurped by the pri­vate banks. The US trea­sury prints the Fed Reserve Notes, the Fed (a pri­vate bank­ing cabal) pays the Trea­sury the cost of the print­ing and then turns around and charges us on the money we bor­row from the Fed that we just printed for them.

    Gov­ern­ments can print money and avoid debt, so why do gov­ern­ments bor­row it and go into debt? That is the ques­tion we should all be asking.

    If we could print our own money in our base­ment, would we go to a bank to bor­row it when we need it? We can’t its called coun­ter­feit­ing. But gov­ern­ments can do it.

    Gov­ern­ments are sup­posed to print money. When they do, there is no rea­son to tax us to pay for money the gov­ern­ment just bor­rowed from the banks. We get into prob­lems when we turn that over to the banks. That is why there is debt.

    And the Con­sti­tu­tion Arti­cle 1 Sec­tion 10 allows for the mint­ing of gold and sil­ver by the states if the states desire. If the fed­eral gov­ern­ment won’t do it, the states clearly can. What the states can’t do is print paper money, which is for­bid­den under the same article.

    So all you gold bug­gers, go to the states and get them to coin all the gold and sil­ver you want to make your­selves feel warm and fuzzy.

  • I see that the usual sus­pects have arrived.

  • Frank Bacon wrote:

    I don’t think you under­stand what ‘backed’ really means. Backed means that you can redeem the note for a quan­tity of a hard asset. How can I exchange my dol­lar for some quan­tity of a national park? What amount of mil­i­tary will I receive if I redeem a note? Not to men­tion that most money is cre­ated by debt issued by pri­vate banks, who profit off of this so-called ‘back­ing’ at our expense.

    The real solu­tion is free money, let us have mul­ti­ple cur­ren­cies backed by dif­fer­ent hard assets. We have the tech­nol­ogy to man­age the exchanges between the cur­ren­cies in real time. Tons of work has been done on how dif­fer­ent cur­rency ‘play’ rules affect their use. All we need is that peo­ple like the author to do some actual research on the topic at hand and move the debate in this direction.

  • […] Although the Bible frowns on wor­ship­ing golden idols, gold’s fans often came very close. In 1874 New York Sen­a­tor Jacob Cox claimed of gold: “pre­cious­ness, cohe­sive­ness and divis­i­bil­ity belong to gold as to no other ele­ment,” and “God has hard­ened it in the mil­lions of years in which the moun­tains come and go like the rain­bow. It is as true as its bur­nished source, the sun.“2 God had made gold to be money. […]

  • Andrew Bissell wrote:

    It’s not clear to me that the mort­gage bond cri­sis had any­thing to do with paper money or that a gold stan­dard would have pre­vented it. Spec­u­la­tive fren­zies depend on expec­ta­tions of increase, not paper.”

    Any halfway coher­ent account of the causes of the finan­cial cri­sis (which is really a debt cri­sis extend­ing beyond mort­gage bonds to all classes of credit, as we are see­ing with Euro­pean sov­er­eign debt) has to include the Greenspan put as a major fac­tor which encour­aged investors to take out­sized risks, secure in the knowl­edge that ample liq­uid­ity would always be thrown on the mar­kets when needed most. Basi­cally, the “risk some­times ends badly” aspect of your for­mula was sus­pended by Greenspan and ser­ial gov­ern­ment bailouts in 1987, 1994, 1998, and 2000. In fact, this prob­lem of the promise of end­less liq­uid­ity and its encour­age­ment of risk-taking was one of the chief argu­ments made by oppo­nents of the estab­lish­ment of the Bank of Eng­land and the U.S. Fed.

    Cen­tral bank­ing advo­cates seem to take it as a mat­ter of course that CBs have reduced volatil­ity in the mar­kets and that this is obvi­ously and inar­guably a good thing. “Look at how many fewer pan­ics we have now than dur­ing the nine­teenth cen­tury,” right? But it is still an open ques­tion as to whether reduc­ing this volatil­ity is wise or even pos­si­ble over the long run. Are we sim­ply defer­ring risks into the future and pil­ing up a series of mini-panics into one big crash? I don’t know … only a view of his­tory from some point in the future, which can cap­ture a full credit cycle (if our cur­rent one’s seem­ingly unstop­pable growth ever does end) will tell.

    We surely might be tee­ter­ing on the edge of the col­lapse of civ­i­liza­tion, or we might not be. The rap­ture could be tonight, or maybe not.”

    You are putting words in my mouth, and the mouths of a lot of other gold bugs (includ­ing e.g. Jim Grant, who has actu­ally been quite bull­ish on the econ­omy). Even a major defla­tion and depres­sion would not be ‘the end of the world’ or any­thing that hasn’t already been seen in this country’s his­tory. And if you agree with either Fisher/Minksy or Aus­trian mod­els of the econ­omy which argue that exces­sive credit and unsus­tain­able debt are a cause of depres­sions, then our cur­rent record lev­els of indebt­ed­ness should raise at least some mea­sure of con­cern, and some exam­i­na­tion of how we got to this point, includ­ing whether our cur­rent mon­e­tary arrange­ments had any­thing to do with it.

    My own enthu­si­asm for free money has noth­ing to do with a fetishiza­tion of gold and every­thing to do with skep­ti­cism about the abil­ity of gov­ern­ment plan­ners to put exactly the right amount of money into the econ­omy at all times. As Jim Grant puts it, “human beings are not com­pe­tent to admin­is­ter a sys­tem of fiat cur­ren­cies backed by noth­ing.” Gold-backed money does have many weak­nesses and prob­lems. Like democ­racy, gold is the worst form of money, except all the oth­ers which have been tried.

    David Mills sug­gests that gold bugs get the states to coin some com­pet­ing cur­ren­cies, but if the fate of the Lib­erty Dol­lar (which was not even pro­moted as “legal ten­der”) is any indi­ca­tion, these would be shut down by the feds in a hurry. All indi­ca­tions are that both the Fed and fed­eral gov­ern­ment under­stand the power their car­tel gives them and will do what­ever it takes to pre­serve it.

  • […] web site The Aporetic explains why the Right is get­ting so gold buggy: Peo­ple who like the idea of a gold stan­dard like […]

  • Eyal Bar:

    Of course we would imple­ment redeemable cer­tifi­cates. How­ever, it was tried in the past and is sub­ject to the fol­low­ing problems:

    1) inabil­ity to expand cur­rency in pro­por­tion to eco­nomic output.

    2) spec­u­la­tive abuses, lead­ing to fraud, etc.

    I stated in an ear­lier com­ment that 2) requires the sort of reg­u­la­tions that are also required in a fiat sys­tem (audits, bank exam­in­ers, etc.). There is noth­ing in a gold stan­dard that makes the polit­i­cal issues any eas­ier to resolve.

    Num­ber 1) is also inter­est­ing. The gold bugs say that price defla­tion is a good thing (and from a con­sump­tion stand­point I get that), what they need to fig­ure out is how to make lend­ing and bor­row­ing work in a defla­tion­ary envi­ron­ment that is also equitable.

    You need a rev­o­lu­tion in order to insti­tute your gold rev­o­lu­tion, oth­er­wise we end up with way too much power in the hands of the “mon­eyed interests”.

    And finally, it is counter-intuitive. If the econ­omy is grow­ing, if there are more peo­ple, pro­duc­tive capac­ity, goods and assets, then it seems only rea­son­able to require more money to rep­re­sent the value of more stuff.

    But with a fixed stan­dard, that means that the unit of account (the dol­lar) must either be in con­stant depre­ci­a­tion with respect to the stan­dard, or that the stan­dard will be an imped­i­ment to eco­nomic growth. Which is, in a nut­shell, the his­tory of US money from post-Civil War to WWI.

    There is noth­ing mag­i­cal about gold except the rel­a­tive sta­bil­ity of its phys­i­cal sup­ply. If gold could be cre­ated eas­ily, or if it were destroyed dur­ing con­sump­tion, then the fluc­tu­a­tions in the sup­ply of the stan­dard com­bined with the fluc­tu­a­tions in the real econ­omy would ren­der it com­pletely unworkable.

    The idea that there is some exter­nal object that will keep us from hav­ing to address the polit­i­cal prob­lems that have plagued all mon­e­tary sys­tems is a fantasy.

  • Exactly right, pebird. The gold stan­dard is the “exter­nal object” that will mag­i­cally remove pol­i­tics from money. It’s absurd. I’ve got another post on the sub­ject set for next week

  • If all new money were backed by gold, would the US gov­ern­ment still rent that money from off-shore bankers?

    I won­der why the US gov­ern­ment refuses to issue it’s own cur­rency instead of need­lessly going into debt to a group of for­eign nationals…

    Maybe those inter­na­tional bankers are the real pup­pet masters?

    How will we know whether the money we rent from them has gold behind it?

  • […] The Gold Stan­dard of Lunacy The Aporetic (hat tip reader Stephen M) […]

  • […] notice about lib­er­tar­i­ans is their fond­ness for the idea of immi­nent col­lapse. “Fiat money” is always about to crum­ble, and bring down civ­i­liza­tion with it. Often this is invoked in a kind of taunt­ing way: just wait and see what your paper money buys […]

  • You got great points there, that’s why I always love check­ing out your blog.

    My blog:
    regroupe­ment de credit et Rachat De Credit fonctionnaire

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  • […] web site The Aporetic explains why the right is then get­ting so gold […]

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