Fool's Gold (article)

Economics
21

This is a nice historically-based essay on the non-effectiveness of the gold standard in accomplishing anything useful.

… Yes, without the gold standard, governments are free to inflate their currency and fuck over the population. However this is certainly not their only means of doing so, and arguably not even the most effective one.

In the last 20 years our currency here in the USA has been relatively stable…

If you are fighting for a better government, then solve problems that are problems, not problems that are… not problems.

I’m still not clear about the point you’re trying to make. Are you arguing that fiat currency is (just as good as / better than / not much worse that) as the gold standard? Or, are you saying that it simply is not the most important issue of the times?

22

I’m still not clear about the point you’re trying to make. Are you arguing that fiat currency is (just as good as / better than / not much worse that) as the gold standard? Or, are you saying that it simply is not the most important issue of the times?

The original topic (and thanks for reeling this back in as the thread slid off the rails about six or eight posts ago) was that the Gold Standard is not something that Objectivists should be interested in supporting.

The original point was that gold in particular has various practical problems, AND that qua the primary usefulness of a currency, the US dollar is perfectly fine for now, and that yes, we all probably have much bigger fish to fry. I also tried to make the point that making a big deal out of something that is in fact a small deal diminishes your credibility.

Others here pointed out something that I started to write myself in a separate follow-on thread: that Objectivism cannot and should not have any particular opinion around what is essentially a business decision. Moreover, advocacy of the gold standard is actually harmful as it muddies the entire issue of the proper role of government. It’s like arguing for more objective, more rational forms of income taxes.

At that point, I thought the thread would end, as my point had been made. I even received a genuine Green Square of approval, a first for me as I had only collected red boxes before. (And now technology has made the green square / red box currency worthless don’t ya know).

So in summary, I’m saying the current situation with our fiat currency is not a particularly pressing issue, and that advocacy of the gold standard is not only fraught with practical issues, it’s quite harmful.

23

For starters, the “cross of gold” arguments have been made for a while. While I haven’t read the article you linked to, the typical complaint against the gold standard is that it does not allow for short-term nominal expansion of money supply, and thus (supposedly) holds the economy back at times when such an expansion could help get it out of a short-term downturn. These arguments are simply not true. The gold standard has an excellent historical record.

One the other side, the problems with fiat currencies have been clear across the decades since the world went off it – around the end of WW-I. Roosevelt literally stole millions from creditors by killing the gold standard. (And, do not reply that he did not kill the gold standard, because if you do, we’re not talking about the same thing.)

Yes, to talk about a gold standard is narrow. One could broaden it slightly by advocating a metallic standard. One can broaden that further by saying that we should have a real-value standard. And, yes, one can broaden that still further and point out that people should be left to decide what commodity, basket of commodities (or widget of whatever type) they will value as being money. However, arguing for a gold standard is not quite like arguing for more rational taxation. It is more like arguing for a specific instance of some rational way the world should be organized if government force were to be withdrawn in the area of currency. It one is going to make the argument concrete, it makes sense to talk of the standard that people often chose when left free to choose.

Even if it is like arguing for more rational taxation, that does not automatically make such an argument bad. It is not wrong to argue for the teaching of (say) phonics in public schools. In principle, it is not unprincipled to argue for a step in the right direction, even if it does not reach perfection. The important thing is to be clear on the underlying larger picture, broader principles, and more-perfect direction.

Yes, when time one argues for any radical position, one will often find oneself in the company of kooks. The reason is that there is a small minority of nut-jobs who are drawn to miscellaneous radical viewpoints simply because those viewpoints are radical. (A bit like the “pseudo-independence” of rebellion for rebellion’s sake.) They end up holding a mix of radical views, conspiracy theories and so on. This ought not deter people from making arguments that are radical. One must make sure one makes one’s arguments using the right reasoning and principles. One must sometimes draw a contrast to the kooks, and point out why one is making a different argument. Importantly, issues like this are very long-term (usually multi-generational) intellectual arguments. As positions go, the gold-standard – having been used all over the world for centuries – is hardly the most radical one for free-market advocates.

Finally, just like it is easy to fight last year’s wars, it is also easy to be beguiled by last year’s peace.

24

But arguing for the gold standard is not like arguing for (better teaching methodologies) in schools for several important reasons.

First, bad teaching methodologies which will have adverse effects “here and now”. The US dollar is not creating any problem “here and now” as it’s a perfectly viable and stable instrument of trade at the present time–and I simply don’t buy that our current government is itching to debase our currency and basically end civilization as we know it which is what would happen in today’s context (which is very different than say the 70s). Yes, it still has a small amount of inflation associated with it, and yes, this is “wrong”, but compared to say, income tax or capital gains tax, this is a non-issue–especially when you consider that unlike income taxes, it’s fairly easy to invest around the problem.

I’m personally in control of significant money [in my work shall we say]. The “inflation problem” is not on my radar. Not even remotely. The people freaking out about pending inflation right now are chasing shadows and making up all sorts of problems that aren’t problems to any normal investor.

So in short, whereas if we continued bad teaching methodologies in schools there would be immediate and irreparable harm to children. If we continue to live with a US dollar that inflates at a rate of about 2% per year, then there will be very minimal harm to the economy–especially when compared to the massive harm caused by other things.

Second, there is no force here, at least at the margin. Anybody in the USA is free to trade in gold, silver, Pesos, Euros, Linden Dollars, or whatever–and they very much do every day. There is a perfectly free market here in the trade of currencies. The open markets are choosing dollars right now, but they could change their minds at any time. This would be true of any currency in the future.

Third, unlike changing the curriculum in schools, which would require some new books and training for teachers (my local public schools already teach phonics fwiw), actually moving the USA to a gold standard today would be a massive undertaking that would be incredibly disruptive to the world economy. It’s almost impossible to imagine how, practically, you would even do it. For that reason, and the reasons above, this is an event that will simply never happen even in a completely Objectivist-controlled world because it’s not worth the trouble.

Fourth, teaching phonics in public schools is something that people can agree that we immediately, specifically need. The technical argument is “simple” compared to the massively complicated business question of currency. As you mentioned, if we abolished the US dollar, markets would probably choose different baskets of goods, or move from one commodity to another, and so forth.

So the gold standard doesn’t belong in Utopia where there would be no government-advocated currency at all, and it doesn’t belong in the “here and now” world because it’s practically not the right solution, doesn’t solve any real problem, and is not at all “easy” to do.

25

The problems with allowing the government to unilaterally determine interest rates and the money supply go far beyond chronic inflation. The roots of the problem are the general issues associated with central planning of any variety. The interest rate is, at root, a price, the price of intertemporal trading. Allowing the government to dictate this price suffers from the same problems as all price-fixing: the severe lack of information on the part of the central planners, market distortions, inefficiencies, etc. Advocating a commodity standard and a free market in money is simply a result of the more general stance of supporting utilization of the market mechanism to organize economic activity, rather than central planners.

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26

The problems with allowing the government to unilaterally determine interest rates and the money supply go far beyond chronic inflation.

Popular monetarists like Milton Friedman are to blame for creating a generation where so many people believe in a simple form of the Quantity theory of money, and ending up further undermining the intellectual underpinnings of monetary standard that is outside political control. The Fed’s monetary policy is an enabler of poor fiscal policy. Doing away with the gold standard, and making the Fed dollar the base-currency also undermined the liquidity of banks. It also allowed the government to more easily control what banks do.

Also, force was used to get away from the gold standard. Physical gold was confiscated. Major contracts used to be written in dollar terms, but always had a gold-clause. The government simply refused to enforce such legitimate contracts. About two or three generations later, the force was removed, but the country is used to the paper-dollar, and universal acceptability is a key attribute of money.

If we had a gold standard, we would not have been in this prolonged recession. Firstly, it is unlikely that we’d have seen such a steep nominal boom, akin to the 1929 boom that came after the U.S. came up with the idea of having a Federal reserve. Even if such a boom had taken place, it would be far more difficult for the government to cushion and prolong the downturn. Instead, we’d have had a sharper and shorter decline. More important than that aggregate is the fact that the differential in outcomes for good and bad behavior would have been sharper. Hoover and Roosevelt prolonged on great recession, while Bush and Obama are prolonging this one. Neither could have done so without a government that was able to mess with money supply.

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27

Somewhat related (government control of the economy), Thomas Sowell’s Real Clear Politics article of yesterday (9/13/11): “Back to the Future III”

“Ninety years ago – in 1921 – federal income tax policies reached an absurdity that many people today seem to want to repeat. Those who believe in high taxes on “the rich” got their way. The tax rate on people in the top income bracket was 73 percent in 1921. On the other hand, the rich also got their way: They didn’t actually pay those taxes.”

28

Yes, it still has a small amount of inflation associated with it, and yes, this is “wrong”, but compared to say, income tax or capital gains tax, this is a non-issue–especially when you consider that unlike income taxes, it’s fairly easy to invest around the problem.

I agree. Inflation has been under 5 percent for decades. I haven’t paid federal, state or local taxes under 5 percent ever, let alone the sum of those taxes. Objectively, the fiat currency problem is small compared to other problems.

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I agree. Inflation has been under 5 percent for decades. I haven’t paid federal, state or local taxes under 5 percent ever, let alone the sum of those taxes. Objectively, the fiat currency problem is small compared to other problems.

It is small now, but there is no way of knowing that it will stay that way. The interest rates are artificially low right now for several reasons one as unpredictable as the next. Sure, we can currently finance our whole massive debt for pennies on the dollar, but what happens if they run out of willing lenders at the current rates and they rise to 20% again like it did in the 70’s or even higher? Depending on the loan terms, that could amount to the total federal budget being spent to service the loans. Think some serious inflation might happen then?

Or what if China decides to amp up their current unloading of our currency? A lot of our lack of perceived inflation is due to Bretton woods and our status as the reserve currency. If that ends…all those locked away dollars could be rushing in, in short order.

There way too many uncertainties in most of the variables and any or all of these could come about over the course of a few years.

Since the fed took over, this has happened every 20 or so years. Bursts of inflation happen all at once every couple decades with periods of relatively low inflation and relative stability in between. I think looking at 10 or even 20 years of this system as a basis for your decisions is foolish. If I flip a coin 23 times and the last 3 are heads, it doesn’t mean the tails have been beaten back forever.

That said, income tax is a huge concern, but only worse in the sense that one person cutting off my leg is more of a problem than someone else cutting off my hand. Neither should be disregarded.

30

If you were to go back a mere 25 years you find a world where a nice, average home in orange county, Ca could be bought for 60k and a new Toyota for 2 grand.

While doing some studying of prices today, I came across a web page that has the following prices for cars in 1981:

New

  • Datsun, Stanza, 6,680.00
  • Dodge, Colt, 6,194.00
  • Volkswagen, Rabbit, diesel, 7,495.00

Used

  • 1979, Pontiac, Trans Am, 7,999.99
  • 1978, Buick Regal, 5,797.00
  • 1977, Pontiac, Bonneville, 3,999.00
31

My dad was able to buy a basic–very basic–Tercel for under five grand, new, 1982 model year.  I remember this because it eventually got handed down to me in 1986.  (I sold it in 1992, and I understand it is still running.)

I do remember early in the 1970s seeing VW Beetles advertised for 999.99.  Some time in the next few years that price had a “1” hanging in front of it.

32

Yep, the price stability we’ve seen in the last 30 years has been an impressive achievement given that it’s been manually produced.

Even when you go back 30 years–and dip into some of the “bad old days” of pre-Volker inflation in the early 80s–you still only get about a 5% CAGR when looking at that web page and cars. Certainly a bit annoying for those who “save” by hiding piles of cash in a mattress, but virtually undetectable for most people who make use of advanced methods like say a “bank”, or buy real estate, etc. etc.

I suppose you can worry about the current climate in Washington doing “a 180” and suddenly both parties talking about Keynsian-style deficit-driven stimulus again*, but then again you can worry about a lot of things. Personally I think there are more pressing problems.

* Wanna take bets as to how many here don’t read every word of that sentence and wrongly point to Obama’s current proposal as evidence of the contrary (as if that bill had a snowball’s chance anyhow)?

33

Since the 80s, the Fed itself has been virtually benign, whereas Congress has lead us directly into the second great depression by what amounted to covert stimulus spending in the form of artificial housing credit expansion. The Fed’s interest rates had nothing to do with the housing Bubble unless you imagine that it should have been acting as a counterweight to Congress’ shenanigans. The Fed was just acting mechanically based on it’s goal of keeping overall inflation relatively low–and it did that brilliantly.

The Fed changed the way it calculated inflation in 1983, so that instead of counting the price of purchasing a home, they counted instead “owner’s equivalent rent.” As homeownership and new construction expanded in the early '00’s, rents collapsed, and housing debt lowered demand for the other components of CPI. The result was that the near doubling of home prices from 2000-2007 was lost on the Fed, and it lowered rates in 2004 to 1%, while the economy was expanding at up to 4% and actual housing price inflation reached a peak of 17%, at the same time the Fed calculated housing price inflation of 2.7%.

Yeah, the Fed had nothing to do with it…

34

The one thing that fiat currencies and gold have in common is the fact that their value is a tautology.

Fiat currencies, however, are harder to counterfiet, easier to handle, and as fictions go, I would rather have a managed fiction than an unmanaged fiction.

35

Managed by whom?