Recently by Gary North: No Criticism of Bernanke Is Allowed
This was posted on one of my site’s discussion forums on the night before Christmas:
Gold based economies more volatile than central bank fiat based money economies??
Roubini: On a return to the Gold standard
“When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm — really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis.” ~ Nov 2010
Where do they get these ideas? Or rather where did I get the idea the boom and busts would be smaller in a gold based society? I know I have heard this multiple times.
But they did have bank panics in the 1800s. So maybe they are right?
My bet is that the booms and busts will occur in a gold based economy but they will not be so big and wild or last as long as in a fiat money based economy.
The person who posted this is well meaning. He senses that Roubini is wrong, but he is not sure exactly why. He is typical of the overwhelming minority of those who think that a gold standard would be a good idea. He means well, but, as they say, he doesn’t get it.
What is “it”? The logic of the free market.
So, let us begin. First and foremost, a government-guaranteed gold standard is a rotten idea. It is just a little better than a fiat-money standard. But advocates of “the gold standard” almost always mean “a government-guaranteed gold standard.” Therein lies the problem. Governments lie. They cheat. They steal.
Over and over, I have returned to this theme: a government-guaranteed gold standard is a fool’s gold standard. I have had great trouble in getting this idea across.
There are two kinds of gold standards: government-guaranteed and privately administered. The first is a counterfeit of the second. The politicians set up the rubes to be skinned. I have written about this here.
I hope you will click the link, print out the 2003 article, and read it twice.
The idea of the gold standard pre-dates Austrian School economics by a century. Ludwig von Mises created the Austrian School by applying the general principles of economics developed by Menger and Bohm-Bawerk to monetary theory: The Theory of Money and Credit (1912). Here, we find the first integrated defense of a free market gold standard.
A short presentation is Murray Rothbard’s mini-book, What Has Government Done to Our Money? (1964).
Something close to a free market gold standard existed in California in 1849–54. That is about the only place it has ever existed.
Here are the characteristic features of a free market gold standard:
1. Private property2. The right of contract3. The enforcement of contracts by the government4. No government licensing of banks5. Open entry in coin production6. No government mint7. No government currency or coins8. Therefore, no legal tender laws
The legal framework begins with private property. The monetary system develops out of this. If the monetary system does not begin with private property and the right of contract, then it is just one more government substitute for liberty. It will fail to bring liberty or maintain it.
December 27, 2010
Copyright © 2010 Gary North