Return to Gold Standard? Think Again.

Some have argued that the deflationary nature of pegging the dollar to the value of gold would have prevented the current economic crisis. That is not necessarily true – the real problem was that the central bank and government did not take asset inflation seriously so the sub prime market was allowed to implode and take the banks with it. Also, stricter rules on the lending to capital ratios and more scrutiny to lending is necessary. The US government ignored the warning of Thomas Jefferson:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Not felxible enough for monetary policy to prvide a ribust economy
Not flexible enough for monetary policy to provide a robust economy

By all means argue that gold has a property that makes more sense (something physical that glitters). The fact that the value of that commodity is dependent on things that are not in tandem with the economy, makes it an insane thing to base the currency on.  It does not work in a modern economy. The experience is that it has led to inflexibility to meet economic problems by making monetary policy less effective, and assumes that gold has an inherent value that is more accurate than the value of a currency relative to that of others. A free floating exchange makes more sense. Under the gold standard interest rates are not based on domestic considerations, but on keeping a currency fixed at it’s parity with gold. In short you could cause a recession just doing this – it has a deflationary bias that causes unemployment to be higher then it would be over an economic cycle.

Basing your currency on the value of one commodity (gold, silver, diamonds, bullshit) makes no sense and poses more problems than it supposedly solves (gold miners go on strike, panic raises price of gold, countries with a natural advantage in gold, relative value of other minerals etc) which may be at odds with what monetary policy should be doing at that moment and makes inflation dependent on gold mining in South Africa and Russia. You end up being a hostage to the value of a commodity that does not reflect the fundamentals of the economy, whose world production you do not control.

Most economists reject the gold standard as not sound monetary policy – not just neo-Keynesian. The main proponents are those that use it are libertarians who see public spending as a threat to freedom, and think this is an effective way to do so. Gold has a value as a means of exchange or storage of value. As the basis of sound monetary policy it does not cut it. … ndard.html


The Credit System, Money and the Economy



Filed under Economics

6 responses to “Return to Gold Standard? Think Again.

  1. Joel

    Dream world. If governments could be trusted to never manipulate their mediums of exchange to advantage some over others and to always function justly, then we wouldn’t need money at all.

    If you assume a priori that the economy will only thrive under “monetary policy” as opposed to “fundamental economics”, then Yes governments and large bureaucracies require currencies backed only by their own “full faith and credit” so that they will have the power to shepherd the economy, and by extension all of us citizens, towards bright and prosperous futures.

    However if you assume that economies work best when they are left to function as economies rather than as some facet of public policy, then No what is needed is a medium of exchange that is as immune to manipulation as possible.

    Current mining production is a red herring, most of the gold that is economically extractable has already been mined. Gold has been used as a currency a lot longer than not-gold. What is currently going on with fiat money is an experiment, and I guess we will just have to see if people 100 years from now are still happy with it.

    • H

      Something physical that glitters….haha what a loser. Gold has retained its inherent value for over three thousand years, A lot longer than the value of the Rupel (gone), the dollar (going) or any other paper hack currency forced upon its people with legal tender laws. Please do not babble on unless you are more informed. Gold is valuable because it is perceived as scarce and rightly so. Something the trillions of paper dollars will never possess. You, frankly, are an idiot or a banker, probably both.

  2. Perhaps you should change the name of your blog to “homo economicus non empiricus”. You make this statement:

    “The fact that the value of that commodity is dependent on things that are not in tandem with the economy, makes it an insane thing to base the currency on. It does not work in a modern economy.”

    In fact, there was no problem with the gold standard until the Federal Reserve Bank was established. Although there were many complaints by investment and commercial bankers and agricultural real estate speculators (also known as the Populist Movement), the economy from 1836 to 1913 performed much better than it did from either 1913 to 1932 or from 1933 to 1971 or from 1971 to present.

    During the gold standard real wages rose a fairly consistent 2% per year. Living standards of laborers in 1889 was double that of 1849. Innovation was across the board and rapid. Immigrants flocked here at a rate of between 100,000 to over 500,000 annually during the late nineteenth century, yet unemployment during the much-touted “depressions” of the 1870s, 1880s and 1890s was mild–immigrants kept coming.

    America did not suffer equal economic adversity until the coming of the Federal Reserve Bank and the Great Depression, which it caused.

    Compare that empirical reality to the empirical reality since 1971–when the barbaric relic known as the Federal Reserve Bank has been given free reign to bungle, stumble, steal, mangle, and stupidly mismanage the money supply to a degree that far outstrips any “dependence on things non tandem to the economy”.

    Since 1971 the real hourly wage has declined by 20%. That never occurred during the gold standard, and inflation is the reason. There has been innovation in a few industries (notably computer technology) but in little else. Compare that to the descriptions of widespread innovation in David Ames Wells’s “Current Economic Changes”.

    Today, stock market and real estate prices have mushroomed, creating massive income inequality as the beneficiaries of fractional reserve banking, hedge fund managers, Wall Street and its economist lackeys in universities, reap the benefits of federal reserve inflation.

    During these years the Federal Reserve Bank has overseen one stupid, destructive, incompetent escapade after the next, while America’s economists have watched, stupidly drooling.

    The Latin American debt crisis; Long Term Capital Management; the Hunt Brothers cornering the Silver Market; Enron; all can be traced to the Federal Reserve boondoggle. The sub-prime crisis is but one more manifestation of the Fed’s destructive maelstrom of wealth transfers to Wall Street.

    I mean, really, did you ever think of taking up a profession where you couldn’t cause so much harm? Dentistry, maybe? (Oops–ouch!)

    • The gold standard is not the best way to control inflation, and the inflexibilty in monetary policy and meeting the demands of a global economy make demands for it’s return antiquatted.

      • Mitchell Langbert

        The gold standard is a much better method than the barbaric relic known as the Federal Reserve Bank. Do you have any other suggestions, or are you loyal to Henry Paulson?

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