In today’s New York Times, Ross Douthat takes on Rand Paul and paleoconservatism on the Civil Rights Act and other issues. “Like many groups that find themselves in intellectually uncharted territory,” writes Douthat, “they have trouble distinguishing between ideas that deserve a wider hearing and ideas that are crankish or worse. (Hence Ron Paul’s obsession with the gold standard and his son’s weakness for conspiracy theories.)”
Douthat is being a bit unfair here. Paleoconservatism isn’t intellectually uncharted territory; whatever its faults or merits, its acolytes built the philosophical foundations of Cold War conservatism. But I don’t want to digress into a pedantic discussion of the intellectual foundations of paleoconservatism. Rather, I want to take on the idea that advocacy of the gold standard is a crankish obsession, one that is intellectually (and perhaps morally) on par with opposing the Civil Rights Act.
If the gold standard is merely a crankish obsession, then the ranks of obsessive cranks include not only Ron Paul but also Friedrich Hayek, Robert Mundell, Jude Wanniski, Robert Bartley, Jack Kemp, and Steve Forbes. That is to say, most of the leading exponents of supply-side economics. (Note that this roll call includes two Nobel laureates.) Indeed, sound-money policies have been at the core of conservative monetary policy from the beginning. It wasn’t too long ago that opponents of the gold standard, like William Jennings Bryan, were thought of as the cranky ones.
It is true that the gold standard is an unfashionable idea in Washington, but it is a mainstream one within the financial community. This is unsurprising on both fronts. The financial community is the consumer of government debt, and is therefore intensely attuned to the relationship of monetary policy to the value (i.e., default risk) of that debt. Investors see over and over again the pattern by which governments depart from hard-money policies (such as the gold standard) in order to engage in deficit spending, and then devalue their currencies in order to reduce the value of the debts they then incur. It is a story that all too frequently ends in credit default and economic collapse. The financial community sees no reason why the United States should be immune from the laws of economics.
On the other hand, the political class is attuned to the value of increasing government debt; that is, of building and rewarding political constituencies with high state spending and low taxation. So it is natural that a return to the gold standard is considered eccentric in Washington.
This is not to say that there aren’t thoughtful, disinterested critiques of the gold standard; there are (Milton Friedman comes to mind). But if we continue on our present fiscal course, it is only a matter of time before the bond vigilantes now ravaging Greece make their way across the Atlantic. When that happens (if not before), countries like China and Russia will take concrete steps to dissociate themselves from the U.S. dollar. Given that few other currencies are ready to take the dollar’s place, don’t be surprised if their next move is a transition back to a metals-based monetary system.
My main objection to the gold standard (besides the point that gold has absolutely no intrinsic value besides being a decent electric conductor) is that it privileges low inflation over everything else: economic growth, entrepreneurship and local economic growth. Why should one type of investment be made a bit more secure by damaging the viability of a dozen others?
I have no clue why people think that global economic growth should be determined by how much of a certain kind of rock is dug out of the ground in a given year.
Reply to this commentLinkReport AbuseHi Minormirror,
An Austrian economist would respond to you by saying that: (1) nothing has intrinsic value -- the value of everything is driven by how much you are willing to pay for it; (2) growth driven by inflation is artificial, because the real value of everything is reduced (just as deficit spending doesn't stimulate the economy because it takes an equal sum plus interest out of the private sector); (3) inflation-driven growth encourages irresponsibility, as it subsidizes borrowers at the expense of savers.
If you care to debate them, you will find ready and willing partners at mises.org.
Reply to this commentLinkReport AbuseHi Avik, looks like we're some of the few people who can actually keep a conversation going on these new forums. Note to mods: e-mail alerts would help. Are introductions in order? I'm a PhD candidate, working on innovation and entrepreneurship. I guess I'm a liberal, but I enjoy reading things that I disagree with and trying to figure out why. Gotta say that Reihan Salam is the best thing the NR has had going for it in awhile.
I'm familiar with the Austrian school, but I have one question that I would like answered by one of them. Austrian economics and gold standard proponents don't seem to allow that ideas and innovation have value. Under the gold standard system, a new innovation and labor doesn't create value, it simply moves wealth from one organization to another. Do all inventions create wealth? I doubt it. Twitter may be popular, but it hasn't fundamentally created any new value in the world. But, something like an efficient way to separate hydrogen from oxygen would add more value to the world than the amount of gold dug up or melted down in a given year. But the gold standard doesn't recognize that, so it penalizes innovators to benefit savers.
Reply to this commentLinkReport AbuseHi Minormirror,
Thanks for your feedback -- I will ask the webmaster about e-mail alerts for comments. I know Reihan will appreciate your desire to seek out the other side, because that is something that he is dedicated to also.
As to your questions about Austrians: they would dispute most of your premises. We already addressed the issue of value; they would also define wealth differently than you do. Twitter does create new value by increasing people's productivity. Austrians would argue that the amount of gold in the world, traced over history, roughly correlates to the size of the population, and certainly the historical record is on their side in terms of the stability of gold's value as a form of money vs. that of government-mandated paper currencies. Nuclear fusion would have more value under the gold standard than under an inflationary system. Innovation, by making the cost of other things lower, would increase the wealth of a person whose wages remained constant.
As to me, you can learn more about me and view a compilation of my writings at my blog, The Apothecary (avikroy.org). Thanks for your interest!
Reply to this commentLinkReport AbuseI would point out that the greatest economic expansion in man's history, from about 1830-1914, took place under the gold standard. Twitter, the Internet, and other so called modern marvels, piggyback on inventions of this time period. At the founding of the U.S., transportation technology was no better than during the Roman Empire.
Reply to this commentLinkReport AbuseWhat of the inability of the gold standard to cure or at least mitigate recessions or inflation? Austrians will tell me that the economy will rearrange itself around the fixed money supply, but weren't we waiting for that to happen for 10 years over the Great Depression?
There's also a practical matter in that there isn't enough gold to base our economy upon, unless we're talking fractional reserves or revaluing gold...in which case the objections against fiat money become relevant to this kinda-sorta gold standard as well. So we have to have a 100% gold standard to address those objections, but where will the gold come from to back our $14 trillion economy?
The reality is that going to a 100% gold standard will shrink the money supply by quite a bit. At the beginning of the Great Depression we saw what happened when the money supply shrank by a third...moving to a gold standard will be much more damaging.
Reply to this commentLinkReport AbuseHi everyone,
Lots to discuss here, and not enough space (nor time)...here is a link to the Austrians' response to many common objections to gold as money (which is different from the Depression-era system that was created along with the Federal Reserve in 1913 and led directly to the bubble of the 1920s). I would also point out that our floating currency has hardly protected us from recessions or inflation. A more comprehensive primer on Mises' thoughts on monetary policy from Gary North can be found here.
A reader named Brent wants to point out to Minormirror that innovation can't occur without startup capital. Startup capital doesn't exist unless investors want to take risks. Investors don't exist unless people save money. As we saw in 2008, once the bubble bursts, investors pack their money into inflation-protected assets (like gold), leaving entrepreneurs high and dry. Inflation may fuel speculative investment in the near-term, but quashes it in the long term; i.e., it only distorts the timing of investment, not the quantity.
Brent also suggests the following op-ed from RealClearMarkets entitled "The Myths About a Return to the Gold Standard."
Reply to this commentLinkReport AbuseWhat about Ben Franklin, he was a proponent of fiat currency? You are essentially arguing by appealing to authorities, and I can play that game too!
Commodities is only one part of what the financial community invests in - they also invest in currencies as well. I think your argument here is weak, if not disingenuous.
My problems with the gold standard are 1) there is nothing to stop governments from going off it when it becomes too expensive for them, as history reveals they have done. 2) any currency based on a precious metal limits growth when that metal becomes scarce and leads to an inflationary period when that metal becomes less scarce. 3) it does not take into account electronic currency which is forming a large part of our money supply today.
Reply to this commentLinkReport AbuseHilary, I agree with you that appealing to authority is a weak argument in favor of any monetary policy. The point of my name-dropping was to refute the assertion that the gold standard was merely the province of eccentric cranks, when in fact it is a credible and well-reasoned view (which people are free to debate).
Reply to this commentLinkReport AbuseGood point minormirror. If I invest in gold, I keep it under my pillow, or someone keeps it for me. There is no growth, other than the increases in value which incurs as vultures peddle it to the fearful.
Can anyone say gold bubble?
Reply to this commentLinkReport AbuseFor most of the past decade, the Federal Reserve has depressed the value of capital by putting its thumb firmly on the interest-rate scale in favor of very low rates. The U.S. economy is now much too dependent on these ultra-low rates for any growth. This type of Fed policy is just one of the reasons some look to gold.
Reply to this commentLinkReport AbuseThere's an argument that fiat did not "save" us from this recession. However, I think that's confusing monetary policy with fiscal policy. I think also that if the expected standard of performance for fiat is 100% protection from inflation or recessions, then just come out and say you don't want fiat money and stop wasting people's time with debate.
I don't believe anyone here said fiat would completely protect us from inflation or recessions (I said "mitigate"). But it does give us a tool to prevent recessions from turning into depressions (which happened eight times from 1807 to 1937 when we kept a fixed money supply...depressions and bank runs were common facts of life under a fixed money supply generally and the gold standard specifically.). Throwing away that tool is shortsighted.
On the second point, the gold standard does what Fed policy did during the Depression...keeps the money supply fixed. I never said the Depression was caused by a gold standard. Indeed, had the Fed increased the money supply it's unlikely we would have had a recession at all. Consider that in 1987 the stock market crashed even worse than it did in 1929, but thanks to appropriate monetary policy from the Fed we didn't even get a recession out of it.
I'm going to stop short of calling the gold standard a crank policy, but I do think it's akin to snake oil. It seems that in times of economic trouble, proponents of the gold standard start popping up to claim it as a cure-all. However, fixed money supply policies create far more problems than they solve.
Reply to this commentLinkReport AbuseHere are some Austrian thoughts on the panics of 1819 and 1873 (each of the 19th century panics had its own idiosyncratic causes). Bottom line is that, even on a gold standard, governments can engage in inflationary policies; nonetheless, hard-money policies do restrain the ability of politicians to behave recklessly.
To put it another way, for the pro-fiat group: at what point will U.S. fiscal imbalances become economically destabilizing? I would assert, as I did in the blog post, that it will happen well before the U.S. is at direct risk of defaulting on its debts. Here is one easily conceivable sequence: (1) rising nations, such as China, gradually move away from their dependence on the dollar, using precious metals and other tools; (2) bond investors gradually move away from the greenback into the yuan (or the currency of another rising power), which they see as more stable; (3) the alternate currency displaces the dollar as the world's reserve currency; (4) the U.S. loses its ability to finance its debt, because investors don't need to buy it (what Greece is facing now, but on a much larger scale); (5) the U.S. defaults or successfully enacts austerity measures. Somewhere around steps 2 and 3, the U.S. stock market will collapse, leading to significant destruction of personal wealth and investment.
Unless we get our fiscal house in order in the near to medium term (highly unlikely), the only way the above won't happen is if every other economically significant country behaves worse (a possibility).
Reply to this commentLinkReport AbuseAvik - re: specie vs fiat currency - arguments can be made for both, but one limits growth by demanding specie backed currency, another does not have this limitation. Ben Franklin saw this.
The main argument for gold is that it limits government spending by requiring a portion of the money supply being backed by gold. But this requirement can easily be ignored by a government in need of cash.
The argument that a specie based currency is harder than a fiat based one is moot IF we have free currency markets which we have today which do devalue currencies where the governments are irresponsible.
Specie based currencies are anachronisms.
Secondly your points rising nations are backed by gold. Please name one? I'll help you out - there aren't any. China buys American dollars to keep their currency artificially low so that they continue to be competitive with America. China is not moving away from the dollar. Where are they going to go? The Euro? There is nowhere else for them to go right now, which is why the US dollar will continue to be the world reserve currency.
China is due for one heck of a correction soon because of all of their currency manipulation.
Reply to this commentLinkReport AbuseHi Hilary, I agree with several of your points, especially the one about how China has nowhere to go right now because people aren't going to flee to the Euro. But that is exactly why a gradual transition to a more metals-oriented monetary policy is a better alternative than pegging their currency to the USD or euro.
And yes it is true that any monetary policy may someday be changed in the future by a more profligate government. This is like saying that it's not worth being frugal today, because we might end up being spendthrift tomorrow. Just because we can't assure the perfection of future monetary policy doesn't mean we shouldn't try to improve it...
Reply to this commentLinkReport Abusebtw Ron Paul (yes Ron and not Rand) advocates a specie based currency to supplement our fiat based currency and to let the public decide. He has obviously never heard of Gersham's law.
Reply to this commentLinkReport AbuseJohnTant - Yes, Ron Paul in his book criticizes the Fed for moving too slowly. Ron correctly sees that had they moved faster the depression might have been a recession. He does bankrupt his own arguments about the Fed here. Note that Thomas Sowell does point out that the markets should do the correction and this is not the Fed's role.
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