Gold Standard Drivel

[OldGimletEye]

For whatever reason, many conservatives in the US have decided that putting the United States back the gold standard would be a spectacular idea. It is in fact, it's a really bad idea. What's worse, some of them seem to be stunningly ignorant of it's history.

Comments by Ted Cruz:

"We had a gold standard under Bretton Woods, we had it for about 170 years of our nation's history, and enjoyed booming economic growth and lower inflation than we have had with the Fed now. "

“In the third quarter of 2008, the Fed tightened the money and crashed those asset prices, which caused a cascading collapse.”

Ok, there are several problems with these statements. First, the period that Cruz is talking about was the Bretton Woods period. The Bretton Woods period was never really a gold standard. Ordinary citizens couldn't demand gold in exchange for their dollars. Only the central banks of nations could demand payment in specie for American dollars. Very few did, except for maybe the French government under De Gaulle, as it was almost considered an unfriendly act.

It's interesting that Cruz would pick the Bretton Woods era. For one this period is where Keynesian thinking dominated policy. Also, it is arguably the period where both in Europe and in the United States various forms of social democracy gained large acceptance before the neo-liberal and conservative backlash of the late 1970s and 1980s.

Also, the United States really wasn't on a gold standard for much of it's history. It was pretty much on a true gold standard from about 1879 to it's entry into World War I and then shortly after WW1 until 1933. And maybe it was arguably on it from about 1834-1862.

Cruz's criticism of the Fed during 2008 is arguably has merit. But it was really more of a case of the Fed not loosening monetary policy fast enough rather than tightening. I am not really sure why he thinks that under the gold standard the right amount of liquidity would have been provided.

Anyway it's a bit rich for conservatives to complain about the Fed's tightening during 2008, because of inflation concerns, when conservatives, like Cruz, are always warning about rampant inflation being around the corner.

In general, there two theories about how the gold standard operated. The first theory is basically an extension David Hume's Price Specie Flow Mechanism. The second theory contends the Price Specie Flow Mechanism is flawed as it does not account for the elimination of arbitrage on internationally traded commodities. Whatever version one believes, the fact is that the gold standard has to be managed correctly in order for it to work as advertised. One of the supposed advantages of the gold standard is that it takes government out of the monetary management business. But, that really is not true, if central banking still remains.

If you believe in Milton Friedman's version of how the Great Depression started, then the culprit was the United States Federal Reserve for falling to expand the United States money supply according to its gold inflows. Friedman's theory is basically the Price Specie Flow Mechanism. The bottom line here is that even under the gold standard, the national governments still have to get things correctly.

If you believe, however, the Price Specie Flow Mechanism does not set international price levels or even national price levels, then main culprits in starting the Great Depression are likely the Bank of France and the United States Federal Reserve. The reason is that price levels are not really set by a nation's note issues, but by the worldwide demand for gold. When the Bank of France started accumulating gold at a rapid rate in the late 1920's, paired with the US Federal Reserve not allowing gold to leave to meet the excess demand caused by the Bank of France's gold hoarding, the excess demand for gold caused it's price to appreciate, which in turn caused the price of commodities to deflate. The upshot here is that for the gold standard to even function, not only do national governments have to get money management right, but the entire international community has to get it right.

Interestingly enough, there is quite of bit of evidence that the quicker a country cut the link between its currency and gold, the quicker the country began to recover from the Great Depression. Soon after Franklin Roosevelt cut the dollar from a gold standard a robust recovery began to follow. Most likely FDR's act of cutting the the dollar from gold (among other reasons perhaps) raised inflation expectations, causing the real rate of interest to decline, making investment more attractive (as opposed to say holding dollars fixed to a specific quantity of gold). Interestingly enough, the rapid fall in the real rate of interest in the 1930s did not lead to any kind of Austrian style bust. I do not recall any such bust in the 1950s or the 1960s.

To many US conservatives, the advantage of the gold standard is that it will control inflation. Evidently, many of them think it is 1979 and not 2015. Excessive inflation has not been a problem. In fact, central banks have had a hard time meeting their inflation targets.

Since about 2009, conservatives have been howling about looming rampant inflation. Part of the problem here, I think, is that many of these same conservatives fundamentally misunderstand how money actually works. They believe in simplistic and wrong money multiplier theories, whereby if the central bank increases the supply of base money, the supply of bank money will increase by some constant number. That is just wrong. It is not how money actually works in a modern economy. Here is a paper that explains how the process works in reality:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

To be fair, when many conservatives and libertarians talk about the gold standard, what they mean is a gold standard with free banking. In other words, they envision a world without central banks, where private banks decide how much bank money they will provide and where that bank money is exchangeable for some asset that the banks cannot control, like gold. In their view, in such a system, liquidity crises will not happen as the private banking system will issue enough bank money to meet people's demands for money. This contention is doubtful because if people for whatever reason decide they want to hold more gold, and not just bank money, the price of gold will appreciate, causing deflation.

The fact of the matter is that the gold standard does not do a great job at ensuring short term price stability.

Austrian and libertarian types seemingly contend that a free banking system, backed by gold would prevent financial crises. But, really I don not understand the reasoning here. If Rational Expectations do not hold in a system of fiat money, with central banking, I am not sure why they would hold in world of free banking backed by gold. A sudden influx of gold, because of improved production processes or because of new gold discoveries, could seemingly set of a credit boom where assets become mispriced from their "fundamental value". On the other hand, shortages of gold, could lead deflation, leading to under investments rather than mal-investments.

Also, in a sense, we already have free banking. The fact of the matter is that banks do issue their own money, mainly in the form of deposits. That bank money is simply exchangeable for little pieces of paper that do have value because people have come to accept them as means of payment and because they can be used to pay taxes. The only difference being that these little pieces of paper can be more quickly printed up, and with less cost, than gold can be found and mined,

The fact of the matter is that the Gold Standard will probably never return to the US or anywhere else. But, the fact that it is being considered as a serious policy proposal by some conservatives just goes to show how nutty extreme conservative economic thinking as been over the last few years.

 

 

 

 

[Ser Scot A Ellison]

Ask people who favor the Gold Standard why Gold has intrinsic value, it's an impossible question to answer.  It's an abstraction like all forms of money.

[maarsen]

If you consider money as the sum total of all the labour done by all the people in the world, then it is not quite an abstraction but a measurement.

[Ser Scot A Ellison]

Maarsen,

The value of labor is subjective making such a measure an abstraction as well.

 

 

[maarsen]

Maarsen,

The value of labor is subjective making such a measure an abstraction as well.

 

 

My labour has a definite price, set by a collective agreement. Adding up all the separate labour deals is rather difficult which is why we use GDP as a measure of the size of the economy. And even that is an estimate. I imagine that trying to accurately measure an economy is no easier than trying to measure the sum of all quantum fluctuations in any dynamic system. 

[Ser Scot A Ellison]

Maarsen,

Yup, estimation suggests abstration to me.

[Larry of the Lawn]

on a soft, damp, bank of the Platte River:

Why just the gold standard?  Where are the bimetallists?  You shall not push down upon mankind this crown of thorns. You shall not crucify mankind upon a cross of gold.

 

[OldGimletEye]

^^^. I was going to suggest Libertarian fairy dust, over-sized Texas Belt Buckles, and Justin Bieber albums.

[The guy from the Vale]

Hey, using Bieber albums as currency would actually increase their utility.

[sologdin]

good thread.

i love the cute little thesis that currency mismanagement somehow causes general ruination of otherwise sound economic systems.  

[The Marquis de Leech]

The Euro is actually an excellent modern analogy to a gold standard.Just replace French gold hoarding with modern German monetary policy, and you've got it (the irony being that France was last to go off the gold standard, and thus had a much longer Depression than everywhere else). Without some means of correcting for current account imbalances, you're going to have problems, because the countries getting shafted by the gold standard or the Euro then have no choice but to engage in pro-cyclic austerity.

[The Marquis de Leech]

on a soft, damp, bank of the Platte River:

Why just the gold standard?  Where are the bimetallists?  You shall not push down upon mankind this crown of thorns. You shall not crucify mankind upon a cross of gold.

If I were around in 1896 America, I'd be a Bryan supporter, no question, but bimetalism runs into head-first into Gresham's Law:

https://en.wikipedia.org/wiki/Gresham's_law

[OldGimletEye]

If I were around in 1896 America, I'd be a Bryan supporter, no question, but bimetalism runs into head-first into Gresham's Law:

https://en.wikipedia.org/wiki/Gresham's_law

Are you saying that notes backed by Justin Beiber albums might drive notes backed by gold out of circulation?

[JonSnow4President]

So disappointed by this thread.  

I thought it was another one talking about Trump's mindless drivel being gold standard of mindless drivel.  

And here I am, actually looking at something about the real gold standard.  For shame internet.

[sologdin]

aren't US treasury notes backed by the US nuclear arsenal?

[OldGimletEye]

So disappointed by this thread.  

I thought it was another one talking about Trump's mindless drivel being gold standard of mindless drivel.  

And here I am, actually looking at something about the real gold standard.  For shame internet.

Perhaps, you could just substitute Ted Cruz as being the Gold Standard of drivel?

Anyway, a couple of other things Ted missed, other than having no clue about Bretton Woods, or was wrong about. Inflation was actually higher in the period that he was referring to as compared to now. And by the way, top marginal taxes were higher too.

[The Marquis de Leech]

Are you saying that notes backed by Justin Beiber albums might drive notes backed by gold out of circulation?

Not just that, but the only way to get the notes backed by Justin Bieber out of circulation would be to introduce notes backed by Republican Presidential candidates.

Alas, there is no hope for notes backed by polar bears.

[OldGimletEye]

Not just that, but the only way to get the notes backed by Justin Bieber out of circulation would be to introduce notes backed by Republican Presidential candidates.

Alas, there is no hope for notes backed by polar bears.

If such a currency ever appears, IM me, so I can short the shit out of it.

[OldGimletEye]

The Euro is actually an excellent modern analogy to a gold standard.Just replace French gold hoarding with modern German monetary policy, and you've got it (the irony being that France was last to go off the gold standard, and thus had a much longer Depression than everywhere else). Without some means of correcting for current account imbalances, you're going to have problems, because the countries getting shafted by the gold standard or the Euro then have no choice but to engage in pro-cyclic austerity.

The Euro might even be worse. If nations of Europe had been able to keep their own currencies, but the currencies were still convertible for Euros at a fixed price, that might have alleviated some of the demand for Euros.
The Euro is like: Everyone in Westeros uses gold coins. There are no banknotes in Westeros to economize on gold coins. And the Lannisters won't make gold coins fast enough to alleviate a rapid demand for gold coins (because Cersei believes prices will rapidly adjust to clear the market because that is what she heard from Rush Limbaugh, not realizing of course that the merchants in Oldtown, Gulltown, and in KL probably have contracts fixed in nominal terms).

[Aemon Stark]

Actually I think Cersei embarks on an expansionary monetary policy via foreign borrowing, ie. Braavos. 

You know... I'm not really sure I get how the Crown in Westeros manages its finances in the absence of fiat currency. Though maybe the Lannisters are de-basing golden dragons like the Roman Empire of the 3rd century. The inflation in KL during the height of the war while Tyrion was in charge was an interesting element.