New at Reason

Brian Doherty interviews Nathan Lewis, an author who's taken another look at the economics of gold.

Comments

prolefeed | August 27, 2007, 3:43pm | #

We need to end FDR's prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

Marcvs | August 27, 2007, 3:52pm | #

We need to end FDR's prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

You're kidding, right? You know that you can old gold now (actually, since 1975).

Marcvs | August 27, 2007, 3:52pm | #

"own" not "old"

prolefeed | August 27, 2007, 4:34pm | #

Marcvs -- Thanks for correcting an incredible blind spot in my knowledge of the law.

*Blushes, kicks stone, shuffles off *

BakedPenguin | August 27, 2007, 5:25pm | #

I remember in business school talking to some idiots who scoffed at the idea of a gold standard (they were idiots for other reasons than questioning the GS). This was in 1997, when the SE Asia currency meltdown was in full force. I pointed out that these countries could have stopped losing billions of dollars by having gold standards, and they just huffed and puffed without addressing the issue.

smokey | August 27, 2007, 6:38pm | #

The more I learn about financial policy, the more I like Ron Paul.

robc | August 27, 2007, 7:35pm | #

prolefeed,

Im fine with letting people have a choice as soon as the government gets out of the fiat money business. Then, people can choose between independent gold money and independent fiat money.

joshua corning | August 27, 2007, 7:42pm | #

We need to end FDR's prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

Not only is it legal to own but the US mint sells it.

http://catalog.usmint.gov/webapp/wcs/stores/servlet/CategoryDisplay?catalogId=10001&storeId=10001&categoryId=10118&langId=-1&parent_category_rn=10191&top_category=10191

jtuf | August 27, 2007, 7:43pm | #

Pegging the dollar to a composite of metals would keep it even more stable. A single metal's value can change a lot, like aluminum's value did.

JasonC | August 27, 2007, 7:44pm | #

Reason has yet to link to it but watch a grumpy looking Brian talk with Will Wilkinson about his book over here: Here

joshua corning | August 27, 2007, 7:48pm | #

Why not have an Iron standard or copper?

Gold is stupid and if you pegged it to the dollar you would simply price it even higher then its utility value.

What the fed really should do is to stop printing and loaning new money (as opposed to replacement) and peg the money supply to a fixed number...this is in essence what the gold freaks want anyway...to peg it to a finite number in the hopes of staving off inflation.

Max | August 27, 2007, 7:58pm | #

Pegging the dollar to a composite of metals would keep it even more stable.

Not much sense in stopping there - why not include a variety of commodities, not just metals?

Daniel | August 27, 2007, 10:08pm | #

What a horrible article. Greenspan years were good for inflation? He was on a defacto gold standard? Booms and busts arent materially different under a gold standard? This is either a put up job or a case of serious economic ignorance, like the above comment about the iron and copper standard.

assman | August 27, 2007, 10:48pm | #

"What the fed really should do is to stop printing and loaning new money (as opposed to replacement) and peg the money supply to a fixed number...this is in essence what the gold freaks want anyway...to peg it to a finite number in the hopes of staving off inflation."

Pegging to a fixed number doesn't work because the economy grows so you need more money. Money is a representation for stuff and if you have more stuff you need more money. So the money supply must grow. If the money supply does not grow then you will get deflation.

The point is not to peg money supply to a fixed number but rather to peg the value of a unit of currency to a fixed value. One dollar today should buy at least as much 50 years from now as it does today.

wyote | August 28, 2007, 3:49am | #

Why is no one saying anything about using a variable supply of money (IE interest rates) to control speculation and prevent depressions?

"[A] If the money supply does not grow then you will get deflation... [B] One dollar today should buy at least as much 50 years from now as it does today."

First, doesn't (a) contradict (b)? Isn't (b) deflation?

Second, why (b)? One dollar today buys a lot less than it bought 50 years ago; and then it bought less than it had bought 50 years earlier. So what?

Bradford C. | August 28, 2007, 6:20am | #

wyote -

It doesn't represent deflation, because deflation occurs when a single unit of currency is valued in terms of more "stuff." If you keep the value at a flat rate, then the money supply stays at the rate of growth, supply of money meets its actual demand.

When there's more money than a demand for it, you experience inflation, and when there's not enough money you experience deflation. Inflation is more tolerable than deflation, but it's not the ideal people present it as, because it discourages savings and inordinately impacts the poor. In inflationary cycles, the poorer you are, the greater the value of your labor comes through immediate consumption. That's what Lewis is talking about with moving sideways, because while middle income families can still save and invest somewhat, the poor have fewer opportunities to move up the economic ladder, since it makes more sense for them in the short term to consume.

Blacks were moving up the social and economic ladders throughout the 50's and 60's, since they were saving money in order to educate themselves or their children. Then hyperinflation hit, and black communities have been stuck in limbo ever since.

wyote | August 28, 2007, 1:37pm | #

Were Blacks and other poor people really investing much in the 50s and 60s? Wouldn't urban decay (loss of manufacturing jobs, etc.) have more to do with it?

Also, deflation is measured in prices, right? Then more things for the same dollar = less dollar for the same things = deflation?

I'm not an economist, but I have never heard anyone talk about inflation as a good thing, but as a necessary evil.

Russ 2000 | August 28, 2007, 3:06pm | #

Where Austrians dropped the ball is in not recognizing (or not hammering the idea) that fractional reserve banking was an unintended consequence of usury laws that have no connection to supply and demand.

joshua corning | August 28, 2007, 3:53pm | #

This is either a put up job or a case of serious economic ignorance, like the above comment about the iron and copper standard.

I am not stupid you are stupid! =P

Anyway kidding aside why don't you enlighten our "ignorance".

joshua corning | August 28, 2007, 3:54pm | #

Pegging to a fixed number doesn't work because the economy grows so you need more money. Money is a representation for stuff and if you have more stuff you need more money. So the money supply must grow. If the money supply does not grow then you will get deflation.

You mean the value of money inflates over time? How again is this a problem?

grumpy realist | August 28, 2007, 7:20pm | #

Well, if you're trying to back your currency with gold you're going to have problems anyhow because of needing to get sufficient real stuff. GNP increases, supply of gold has to increase as well. If you can't find sufficient, you're going to need to change the peg between dollar and gold.

Frankly, considering the shenanigans I've seen in gold prices over the last several years, I think a gold peg is ridiculously naive.

Shannon Love | August 29, 2007, 10:59am | #

I don't think that a gold standard will work in the modern world.

Although, a gold standard might protect from internal political inflation and deflation, it can't protect from inflation and deflation caused by changes in supply of gold itself. Prior to the 20th century, gold rushes could set off periods of inflation by injecting significant amounts of gold into the world monetary system. Conversely, rapidly growing economies could suffer deflation when economic growth out paced gold production.

In our world of rapidly evolving technology we also run the risk that a new technology will make use of gold and that lots of gold will be removed from circulation creating a deflation.

I think economic national security also plays a role. The U.S. abandoned the gold standard in the early 70's in part because the Soviet Union produced 3/4 of world's new gold. It's easy to see how a country with a well disciplined fiat currency could wage economic warfare on a gold standard country by manipulating the gold markets with hoarding and/or flooding. Today, a gold standard would place the world economy at the mercy of the Russian Federation and South Africa. Neither particularly stable places.

I think the Greenspan system of keeping an informal linkage between gold and the fiat currency works best. I don't think we have any short cuts to political discipline.

Fuzzy Thinker | August 29, 2007, 11:21am | #

Under Greenspan the dollar lost 50% of its value.

If that's an example of a gold mimic standard, god save us all from outright inflation.

brian | August 29, 2007, 11:28am | #

A gold standard is no different than fiat currency. It is a completely arbitrary value. A thing is worth only that which another is willing to give for it.

Picking a fixed number and saying "a dollar is worth this fraction of an ounce of gold" is completely boffo. It's a complete denial of capitalism. And it assumes that gold has intrinsic value, which it does not. And how the heck is this supposed to stop inflation? And why does it matter? Unless you can convince people that they should earn the same salary forever, inflation is pretty much guaranteed.

Anyone who has been paying attention could tell you quite well that it was the emergence of the welfare state and the destruction of the nuclear family that undermined the growth of the black middle class in America. Government fiscal policy had nothing to do with it.

Mark Michael | August 29, 2007, 12:31pm | #

One of the impacts of going to a gold standard is that the value of the currency does not adjust for labor productivity growth. In other words, if we have productivity growth of 3% per year, then under a gold standard, prices will drop 3% on average each year. That's because gold's value stays fixed. Productivity growth makes it possible to produce goods and services for fewer labor hours, less expensive parts, etc. and so price drop.

With a fiat currency, the Fed takes advantage of its fiat nature to devalue its value by expanding its base as much or more than labor productivity growth. It then can keep the CPI at or above zero, not go negative by 3%.

Now, admittedly, gold's value can fluctuate if big new finds of gold are discovered, but surprisingly, when it's used as a currency, feedback loops stabilize it. Also, those big gold finds actually play out over several years, and their impact is actually relatively low.

Gil Roth | August 29, 2007, 1:13pm | #

Wouldn't returning to the gold standard make us vulnerable to the plots of Darwin & Minerva Mayflower?

Bob Ellison | August 29, 2007, 10:42pm | #

The old gold standard worked because gold was scarce and universally recognized as valuable. In modern times, that won't work, because gold's intrinsic value is mostly in technical pursuits. The value is a myth based on its rarity, and that doesn't work in the 21st century.

If we had a truly rare and unreproducible commodity, we could make a new money standard based on it. But gold ain't it.

Bob Ellison | August 29, 2007, 10:43pm | #

Helium might be it.