And We All Shine on

Matt Welch | February 19, 2008

Do you care about the gold standard? I sure don't. But for those of you who do, Cato released a new report this month calling it "far from a crazy idea," while The New Republic today is touting a blog post calling it "a terrible idea," based on one interview with a "monetary expert at Harvard." Meanwhile, a trip down Google News will reveal that the phrase these days is almost entirely metaphorical.

Has reason talked about the gold standard over the years? A time or 12, yes. David Weigel pondered the resonance of Ron Paul economics back in October; Brian Doherty interviewed gold-pegger Nathan Lewis last August; Jeff Taylor in 2005 analyzed why Ayn Rand fan Alan Greenspan abandoned his youthful gold-buggery; and Thomas Hazlett talked gold standard (and more) with the one and only F.A. Hayek back in 1977.

Comments

|2.19.08 @ 5:22PM|#

CATO should mint a special CATO coin for the hell of it.

Hell Reason should as well, one with Matt's mug on it.

|2.19.08 @ 5:25PM|#

Do you care about the gold standard?

It's on my list of 'libertarian pipe dreams I'll never live to see'.

Cato released a new report this month calling it "far from a crazy idea," while The New Republic today is touting a blog post calling it "a terrible idea,"

As far as Ad Hominems go (and Pro Hominems?) that's a pretty strong argument to go for the gold.

javier|2.19.08 @ 5:37PM|#

TNR = fascists

being nailed to a cross of gold is like being nailed to a cross of spending within your means. and TNR knows we can't have the gov't do that.

Sam Grove|2.19.08 @ 5:38PM|#

Nothing matters if government spending isn't drastically reduced.

stephen the goldberger|2.19.08 @ 5:42PM|#

The thesis of the Cato piece: The Gold Standard is not a crazy idea.

uh ok, thanks.

Jacob|2.19.08 @ 5:42PM|#

Matt

As dense, dry, and confusing as the economics of money and banking can be, there are few sectors more important to the functioning of the economy.

Personally, I'm a free-banker and proud of it!

http://en.wikipedia.org/wiki/Free_Banking


P.S. People interested in monetary economics that only read Mises Institute stuff are kooks.

Jacob|2.19.08 @ 5:48PM|#

P.P.S.

The free Hayek download linked to at the bottom of the wikipedia piece looks tasty: "Choice in Currency: A way to stop inflation" by F.A. Hayek

|2.19.08 @ 5:48PM|#

Come to think of it Reason should have a whole coin set with all the former and current editors..

Virginia Postrel's coin could have the motto "International banker is code for "jew""

Rhywun|2.19.08 @ 5:49PM|#

I'm about as far from an expert in this matter as you can get, but... what's so crazy about having a currency that's actually backed by something tangible? As opposed to empty promises made by governments and banks?

|2.19.08 @ 6:05PM|#

What's the difference? Most of our currency is in electrons, anyway. I'm hording trillions of subatomic particles, myself.

|2.19.08 @ 6:06PM|#

what's so crazy about having a currency that's actually backed by something tangible?

So a pretty metal which is over priced compared to utility value cuz of the "romance" associated it with it is tangible?

I would hate to see what you consider fantastical.

|2.19.08 @ 6:07PM|#

what's so crazy about having a currency that's actually backed by something tangible?

Oh, our currency is backed by something tangible.
And that's our collective delusion that the government knows what the fuck it's doing every time it nudges interest rates or sheets out a fresh roll of fiat money.
In other words, it's backed by stupidity.

|2.19.08 @ 6:09PM|#

Theoretical question for the economists out there.
When we become a totally paperless society, how will the gold standard still be a relevant issue?

|2.19.08 @ 6:10PM|#

Most of our currency is in electrons, anyway.

No kidding.

Even when gold coins were the coin of the realm, their simple impracticality for large transactions and/or reserves meant that people immediately set up networks that dealt in trust/paper.

Seriously, how many of you would pay for your new house by hauling 30 pounds of gold to the title company?

|2.19.08 @ 6:15PM|#

Seriously, how many of you would pay for your new house by hauling 30 pounds of gold to the title company?

If I had 30 pounds of gold, you'd find out right away.

Montgomery Cliff|2.19.08 @ 6:17PM|#

reason sucks

Sman|2.19.08 @ 6:22PM|#

haha that TNR blog post was of pretty low quality, I guess its over the head of a Harvard "money expert" to realize once deflation is occurring it is priced into interest rates, so the gold standard doesn't favor Wall Street. He would know this if he read Human Action :o

Seer|2.19.08 @ 6:29PM|#

How about we support gold and silver simply because having prices based on commodity makes more sense from a market point of view than allowing a government to tamper with the price of EVERYTHING IN THE GOD DAMN COUNTRY by tinkering with money supply. Even if it turns out gold and silver are a bad commodity, we'd still allow the trading of other commodities. However, when we get stuck with bad currency by law, we're boned.

Seer|2.19.08 @ 6:30PM|#

Also:

Cato released a new report this month calling it "far from a crazy idea," while The New Republic today is touting a blog post calling it "a terrible idea,"

As far as Ad Hominems go (and Pro Hominems?) that's a pretty strong argument to go for the gold.

Second'd.

Jacob|2.19.08 @ 6:51PM|#

The Cato piece is really simple and informative, if anybody's interested. Recommended.

Robbie|2.19.08 @ 7:02PM|#

Seriously, how many of you would pay for your new house by hauling 30 pounds of gold to the title company?

As I understand it, banks would store gold and issue private bank notes (ie paper money) which is redeamable for gold. Checks and credit cards would work exactely the same as they do now. Banks would arrange for the movement of gold between banks when checks are deposited etc.

|2.19.08 @ 7:12PM|#

Seriously, how many of you would pay for your new house by hauling 30 pounds of gold to the title company?

I sure as hell would. Thirty pounds is nothing; I'll be curling 40s here in about fifteen minutes. If only them dumbells were gold...

|2.19.08 @ 7:13PM|#

I read the Cato piece on the way home - part of it. I like it so far.

Steven Horwitz|2.19.08 @ 7:30PM|#

The gold standard referred to in the Cato piece (which is by Larry White, arguably the "godfather" of modern free banking theory within Austrian economics) is not one where gold is use in hand to hand transactions. Rather it is "outside money" - which is what the money the bank creates (e.g. deposits and currency) is redeemable in. Folks would still use all the same financial instruments as today, including debit cards, the only difference would be that banks would have to hold minimal (as in 1% or less of the value of their outstanding liabilities) as reserves. Both deposits and currency would be produced competitively by banks.

The point of the gold standard is to rein in the ability of banks (or even a central bank) to create too much or too little money. In the absence of a gold or other commodity standard, the banking system has no economic cost when it inflates or deflates. It might pay politically but not economically.

Thus, the gold standard is ultimately an institution that both promotes monetary order and prevents governments from using inflation to finance their activities.

It is, in that sense, a really important "constitutional rule."

|2.19.08 @ 9:05PM|#

If one can make a case against the gold standard, then make that case and propose an amendment to the constitution to permit fiat currency.

The gold standard as written in the constitution imposes no restrictions on any private issuer of currency, it only prohibits the government from printing funny money. If people really want paper currency, then let private issuers supply it.

The real problem is that the government has the power to require us to accept their bogus scrip.

-jcr

|2.19.08 @ 9:08PM|#

I would hate to see what you consider fantastical.

I consider it fantastical to suppose that printing more zeroes on a note makes it worth more, when the issuer of that note has reneged on its contractual obligation to redeem the note.

-jcr

LarryA|2.19.08 @ 9:20PM|#

Haavaad actually has a "money expert?

When we become a totally paperless society, how will the gold standard still be a relevant issue?

Right. And how many printers were manufactured last year?

|2.19.08 @ 9:51PM|#

Matt said:
"Do you care about the gold standard? I sure don't."

Forgive me but are you really that uninformed or are you a Milton Friedman fan who wants the government to REALLY establish a sound currency with a fixed increase in money supply each year.

I am not sure how one can work for Reason and not understand money. I must be missing something. A gold backed currency is for people who think that in the history of mankind no government has ever NOT blown up their fiat currency. What am I missing?

|2.19.08 @ 11:56PM|#

P.S. People interested in monetary economics that only read Mises Institute stuff are kooks.

. . . with absolutely no reason or explanation given as to why, so as not to end up looking like an ass after the debunking begins.

|2.19.08 @ 11:58PM|#

The gold standard as written in the constitution imposes no restrictions on any private issuer of currency, it only prohibits the government from printing funny money.

That's totally correct. The current Legal Tender law is actually unconstitutional.

|2.20.08 @ 12:00AM|#

As I understand it, banks would store gold and issue private bank notes (ie paper money) which is redeamable for gold. Checks and credit cards would work exactely the same as they do now. Banks would arrange for the movement of gold between banks when checks are deposited etc.

Oh, so we're back to paper money. Got it.

Alright, I'm being intentionally obtuse. Somewhat. Or maybe not really.

I'm not sure how much difference it makes to talk about a gold-backed currency when something like 2 -3% of the money in circulation right now is currency of any kind.

We already have something that's a lot closer to "free banking" than you may suspect. Its called fractional reserve banking. Banks are allowed to make loans to people in amounts far in excess of the deposits they actually have in the vault, so to speak. A bank may have $1 million on deposit, and $50 million in loans. Remember, to a bank, deposits are liabilities (because they owe the depositor the money), and loans are assets (because the borrower owes them the money).

For the life of me, I can't see a real difference between a bank issuing credits (paper, electronic, whatever) when it doesn't have US currency to match them, and a bank printing its own currency. Either way, the bank is putting money into circulation.

Unless you do away with fractional reserve banking (meaning, banking as we know it), a gold-backed currency isn't going to change that. So you're still going to have lots of money in circulation that can't be converted into actual physical gold. How's that not "fiat money"?

|2.20.08 @ 12:02AM|#

I am not sure how one can work for Reason and not understand money.

Practically nobody understands money. In some ways, it is one of the most diabolically subtle and elusive concepts we've ever come up with. The best explanation I've ever heard for it is that it is a consensual hallucination.

Brandybuck|2.20.08 @ 12:05AM|#

P.S. People interested in monetary economics that only read Mises Institute stuff are kooks.

Sometimes I get the sense that the anarcho-capitalists at the LvMI would love nothing more than to have government impose the gold standard on everyone at gunpoint. The only time you ever hear them advocate government action is in regards to gold. Bizarre.

As for me, I hold to the free market. The Federal Reserve is bad, but a fractional reserve gold standard isn't that much better. I think a 100% reserve gold standard would be tolerable, but what I really want is for the government to get out of the monetary sphere entirely. If the free market decides on gold, then fine. But with today's technology and accounting, I suspect it will come up with something we haven't even dreamed of yet.

|2.20.08 @ 12:06AM|#

Haavaad actually has a "money expert?

Harvard has buildings full of them. They should. Their endowment across all schools is probably in excess of $30 billion by now.

|2.20.08 @ 12:09AM|#

I think a 100% reserve gold standard would be tolerable,

I don't think anyone understands what doing away with fractional reserve banking would really mean. It would be cataclysmic, you can be sure of that, but what a modern capitalist economy would look like without fractional reserve banking is a total mystery.

Paul|2.20.08 @ 12:46AM|#

I much prefer a silver standard.

|2.20.08 @ 12:47AM|#

While I don't think the gold standard is a crazy idea, I do think it's probably a bad idea.

The question is, is it worth getting rid of monetary policy in exchange for protection against inflation. I'm only 19 years old so inflation hasn't really been a problem in my lifetime. Inflation targeting by central banks has worked pretty well in keeping the price level stable enough.

What would be the benefit of trading a system that works quite well for one that would tie the hands of the central bank and stop them from fighting recessions? Most mainstream economists support the fiat system whether they are new classicals or new keynesians. It seems only the austrians think the gold standard would be helpful.

hamilton|2.20.08 @ 8:14AM|#

I read the article and really liked it. I'll admit to being really uneducated on this topic and feeling somewhat bad about that. I have been looking for non-whack-job books for a while now. Does anyone have any reasonable recommendations thereto? Ideally intelligent analysis and comparison, not quasi-religious / anarchistic proselytizing.

hamilton|2.20.08 @ 8:14AM|#

And yes, I get the irony vis-a-vis my moniker.

Steve Horwitz|2.20.08 @ 11:56AM|#

Hamilton,

Some recommendations:

General on money:

White's The Theory of Monetary Institutions

On free banking:

Selgin's The Theory of Free Banking

On free banking and Austrian macroeconomics, you might look for my own book Microfoundations and Macroeconomics: An Austrian Perspective. It's on Amazon, but VERY expensive. You're more likely to find it at a local college library.

Hit my webpage and email me if you want more.

|2.20.08 @ 12:45PM|#

I wouldn't want to holding gold if the sh*t hit the fan.
Money should be backed by alcohol, tobacco, and firearms. And no, that's not a Warren Zevon song.

|2.20.08 @ 8:25PM|#

You know, I'm not usually big on schadenfreude, but I'm kind of going to enjoy seeing everyone who blithely declared that they "didn't care about gold," watch the dollar balances in their savings accounts get inflated to oblivion.

|2.20.08 @ 10:23PM|#

"Even when gold coins were the coin of the realm, their simple impracticality for large transactions and/or reserves meant that people immediately set up networks that dealt in trust/paper.

Seriously, how many of you would pay for your new house by hauling 30 pounds of gold to the title company?"

I would, sure :D.

But there is nothing in a gold standard, as you just proved, to prevent gold-backed paper currency. The point is to get rid of the non-gold-backed stuff.

|2.21.08 @ 12:39AM|#

Why is the gold standard a bad idea?

1) It's heavily, and demonstrably, pro-cyclical. If you don't know what that means or why that is, you need to do further research before solidifying your opinion.

2) Out-sourcing our interest rate to unelected technocrats might not be perfect. Out-sourcing our interest rate to the dumb luck of prospectors is even less perfect. If you don't understand why this is...*damn*.

3) Deflation is bad.

Generally speaking, it is impossible to find a serious economist at ANY major university who will even entertain the notion. Smart people who dedicate their lives to studying monetary economics overwhelmingly conclude that returning to the gold standard is loony.

If 99 out of 100 doctors told you not to drink the stuff you find under the sink, and someone at the Von Mises institute told you it would give you superpowers, what would you think?

|2.21.08 @ 5:57AM|#

If 99 out of 100 doctors told you not to drink the stuff you find under the sink, and someone at the Von Mises institute told you it would give you superpowers, what would you think?

I would think doctors are a lot better at giving good advice than tenured university economists.

Golden Toast|2.21.08 @ 9:23AM|#

K. Larson, that's what I keep thinking. I don't get it. Maybe it's all that colloidal gold they're ingesting.

Forgive me for bringing it up, but if Ron Paul had stressed the idea of competing currencies more, then it would be an interesting and unfamiliar lesson for most people who heard it. But the mysticism of gold buggery doesn't complement a platform of (rightly) harping about market functions.