US To Return to Gold Standard. Really?
by Robert Blumen
by Robert Blumen: Value
Investors Hate Gold
Forbes, speaking to Human Events predicts "a return to the
gold standard by the United states within the next five years."
Why? Because it would "help the nation solve a variety of economic,
fiscal, and monetary ills."
Such a move
would help to stabilize the value of the dollar, restore confidence
among foreign investors in U.S. government bonds, and discourage
reckless federal spending, the media mogul and former presidential
candidate said. ...
If the gold
standard had been in place in recent years, the value of the U.S.
dollar would not have weakened as it has and excessive federal
spending would have been curbed, Forbes told HUMAN EVENTS.
idea "makes too much sense" not to gain popularity as
the U.S. economy struggles to create jobs, recover from a housing
bubble induced by the Federal Reserve’s easy-money policies, stop
rising gasoline prices, and restore fiscal responsibility to U.S.
government’s budget, Forbes insisted.
With a stable
currency, it is "much harder" for governments to borrow
excessively, Forbes said.
good stuff, Steve. But really? Are you kidding?
things generally don't happen because they "help the nation" or
"make too much sense." If we lived in that kind of world, and
the 19th century gold standard had so much going for
it, then why do we was it abandoned in favor of the present system?
It was abandoned
for political reasons. Factors leading to the demise of the gold
standard were the desire of governments to spend in excess of politically
tolerable levels of taxation, the need to finance World War I and
other wars, and the wishes of the banking for a lender of last resort
to bail out over-leveraged banks when they had insufficient reserves
to cover their losses.
have a logic of their own quite different from the kind of logic
that Forbes is using in which good things happen for good reasons.
In politics, interest groups organize to gain influence over the
government and implement policies for their own benefit, at the
expense of the rest of society.
But why does
political logic defeat common sense? The public choice school of
economics has given us an explanation of the insidious process by
which the few exploit the many. They point out that concentrated
benefits and dispersed costs lead to rational ignorance. Translating,
"concentrated benefits" are the large returns earned by the privileged
groups through subsidies or bailouts. For each one of us tax players,
the cost of any individual bailout or welfare program is quite small,
hence "dispersed costs." In looking at political action to
fight the system, the individual taxpayer faces the following set
of tradeoffs: the time and effort to understand even one piece of
legislation or policy is substantial, and even if opposition to
a particular program were effective, it would only save a few dollars
in taxes. This leads to "rational ignorance," the decision
by most taxpayers that the return to working harder at your job
or just enjoying life is much greater than the return to political
Given a outcomes
that are dominated by public choice logic, the monetary system will
not be reformed when "it makes too much sense" to do so. It will
not be reformed because that would put government finances on a
sound footing, nor to restrain war-making. Stabilizing the dollar
won’t do it either. The current monetary system (or as James Grant
calls it, non-system) will be replaced, eventually, because it will
What will the
alternative to the current regime of central banks, floating exchange
rates, and unbacked fiat money look like? Here I must reject the
wishful thinking that "things need to get worse so people will
be really angry and insist on something better." Things do
not necessarily get better when there is a crisis. Things can get
worse and stay worse, or get worse and then go even further downhill.
I'm not sure
what Steve Forbes had in mind, because the term "gold standard"
is used differently by different people. The most conventional definition
a system of national currencies exchanging at fixed rates, with
central-banks, each one having some gold as a reserve
asset. In this world, central banks are obligated to provide a form
of convertibility, though reserves held may be less than 100%. Individual
nations may, under some conditions, be able to devalue their own
national currency relative to the fixed rates and to gold.
to Murray Rothbard’s theory
of banking, the gold standard means gold as money proper with
banks holding 100% reserves against demand deposits. Under these
conditions there is no necessity or even any purpose to having a
central bank and devaluation is a form of default.
Forbes have in mind? He has been associated
side economics, who have their
own so-called "gold standard." I say so-called because
it is not much of a gold standard at all, only a rule that the central
bank is supposed to manage the inflation of the fiat money system
in line with the gold price. Under this system, gold is not money
proper, it is a good whose price is considered the best indicator
of the looseness or tightness of monetary policy. As
Frank Shostak points out, this system offers none of the advantages
of using real gold as money. And why should anyone expect that when
push comes to shove, the Fed will follow any rule when the situation
seems to demand improve comedy? As Murray Rothbard wrote in his
critique of a similar money supply growth rule advocated by Milton
Friedman, "Of course, Friedman would then advise the Fed to use
that absolute power wisely, but no libertarian worth the name can
have anything but contempt for the very idea of vesting coercive
power in any group and then hoping that such group will not use
its power to the utmost."
When the current
system fails, there are two primary barriers to the adoption of
a better system. The first is the political actors who moved to
abandon the gold standard the first time around haven't gone away.
The vested interest of powerful groups who wish to use the fiat
money printing press are still around; if a new opening appears,
the usual suspects will apply for their jobs back. That which has
not killed them has made them stronger
the a deeper obstacle is ideology. Most economists and central bankers
believe that a) an economy cannot grow without an increasing quantity
of money, b) the gold standard caused the Great Depression, c) The
Fed determines monetary policy, a necessary and beneficial function
and, d) the banking system (and maybe the auto industry too?) needs
a lender of last resort in the case of financial crises, you know,
those crises that just sort of happen, that come out of no-where
with no warning and hit us when we least expect.
None of the
preceding propositions are true, but as long as they are accepted
factoids, the next monetary system is likely to look a lot more
like the current one with extra lipstick than anything that existed
in the 19th century.
Blumen [send him mail]
is an independent software developer based in San Francisco.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
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