Thursday, December 15, 2005

In Defense of "Goldbuggery"

Hat tip to Angelica of Battlepanda for linking to James Hamilton's and Brad DeLong's critiques of the gold standard. Her blog post is interesting:


James Hamilton has written the definitive take-down of the supposed benefits of pegging one's currency on a gold standard. Brad Delong says it shorter: "If your government doesn't have monetary-policy credibility, attempting to establish that credibility by going on the Gold Standard is a recipe for disaster. If your government does have monetary-policy credibility, going on the Gold Standard doesn't gain you anything."

I was surprised by her characterization of Hamilton's piece as a "definitive take-down" of the benefits of the gold standard -- I found it singularly unimpressive. Hamilton and DeLong attack the same old strawmen about the gold standard that the Austrians have repeatedly refuted.

For examples, see Joseph Salerno, "Money and Freedom":

Those who implicate the gold standard as the main culprit in precipitating the events of the 1930’s generally fall into one of two groups. One group argues that it was an inherent flaw in the gold standard itself that led to a collapse of the financial system, which in turn dragged the real economy down into depression. Writers in the second group maintain that governments, for social and political reasons, stopped adhering to the so-called "rules of the gold standard," and that this initiated the downward spiral into the abyss of the Great Depression.

From either perspective, however, it is clear that the gold standard can never again be trusted to serve as the basis of the world’s monetary system. On the one hand, if it is true that the gold standard is fundamentally flawed, that in itself is a crushing practical argument against the principle of monetary freedom. On the other hand, if the gold standard is in fact a creature of rules contrived by governments, and it is politically impossible for them to follow those rules, then monetary freedom is simply irrelevant from the outset.

The first argument is the Keynesian argument and the second the monetarist argument against the gold standard.


In the face of the historical evidence they adduce, can any defense be mounted in favor of the gold standard? The answer is a resounding "yes," and the defense is as simple as it is impregnable. As I have tried to indicate above, the case against the gold standard is from beginning to end a case of mistaken identity. The genuine gold standard did not fail in the 1920’s, because it had already been destroyed by government policies after 1914.

The monetary system that sowed the seeds of the Great Depression in the 1920’s was a central bank manipulated and inflationary pseudo-gold standard. It was central banking that failed in the 1920’s and stands discredited to this day as the cause of the Great Depression.

And Lew Rockwell, "Our Money Madness":

Should our monetary system be reformed so that it is based on a pure gold coin standard? Yes it should. This would be the single best reform we could make for the cause of freedom. Its commercial benefits include stability, predictability, and honesty in finance. Its moral benefits include a financial system that does not reward living beyond one's means. From the point of view of government, a gold standard would tie the hands of the state. They could wish and long for wars, welfare, foreign aid, bailouts, subsidies, and graft, but unless they could raise the money by taxing, all their talk would be pointless. That is a country I want to live in.

For years I've heard people suggest that the Mises Institute come up with a detailed plan for how the conversion would work. In fact, there are many models to choose from, from Joseph Salerno's to Murray Rothbard's to George Reisman's to Ron Paul's own legislation, which has been before the House for some two decades. What is lacking is not a plan. It is the political will. It would require that the government recognize the error of its own ways, agree to limit its power and influence, abolish the Fed, and return the control over economic structures back to the people. And you wonder why the movement for a gold standard struggles!

Finally, if the gold standard were the Force, Murray N. Rothbard would be its Yoda. For goodies too numerous for snippage in this space, see the following from Rothbard:

***NOTE: Honestly, I have no intention of starting an econ wonk slapfight. I admire Angelica's well-written, entertaining blog and am a regular reader of Battlepanda. The point here is to raise awareness of the counter-counterarguments to the gold standard. The scholars have done the heavy lifting on this issue already, so -- having no scholarly credentials of my own -- consider my contributions here a mere conduit into further research on this debate. Please read the links. Carry on.***


Brad Spangler said...

Hi Jason,

Since you don't have trackbacks set up, I'm leaving a comment to alert you to a related post on my blog.

Thanks for a great post that I can refer people to!

Brad Spangler

Battlepanda said...

Hi Jason,
Thanks for reading my blog. I would love to start a slapfight on just about everything, but unfortunately I know too little about the subject at hand to dig in.

I do have a couple of questions for you though: what is so special about gold that makes it suitable as a monetary unit? Sure, it's shiny and pretty, and in the old days it was really easy to cart around. But nowdays, isn't it kind of an arbitrary choice to insist that we keep a bunch of metal bricks in a vault for every million dollars we're circulating?

It seems to me what the gold bugs want has not so much to do with the metal itself, but as a shorthand for a whole passel of changes that rein in the Fed. In the post you talk of the pseudo-gold standard of the 1920s, implying that the dollar can be technically tied to gold but still not satisfy you as being a true gold standard. How does that work?

Just so that everybody is talking about the same thing, why not unpack exactly what powers you think the Fed should and should not have and what the rules on money creation/fractional banking should be without bringing in the pretty metal?

J Ballot said...

Hi Brad,

Thanks for the kudos and glad I could help with your light work! You have a fantastic blog and I'm honored just to have garnered a mention.

Just trying to contribute whatever I can to advance the cause of freedom (um, the Misesian/Rothbardian anarcho-capitalist kind, not the "Bush in Iraq" kind).

Thanks again for visiting and for taking the time to alert me to your post!

Take care,

J Ballot said...

Hi Angelica,

Ah yes, the internet slapfight. I was weaned on usenet's Atlanta Braves newsgroup and have taken my fair share of poundings. Unfortunately, I too would have to concede to knowing too little about the subject at hand to engage in serious combat.

But you ask some excellent questions and I'll do my best to address them. Your first set of questions ponders, "why gold?" Just to reiterate the disclaimer at the bottom of my post, I'd rather defer to the experts than reinvent the wheel (one that wouldn't roll downhill, I might add). Here's Rothbard's answer, from his essay "The Case for the Genuine Gold Dollar:"

"We conclude, then, that the dollar must be redefined in terms of a single commodity, rather than in terms of an artificial market basket of two or more commodities. Which commodity, then, should be chosen? In the first place, precious metals, gold and silver, have always been preferred to all other commodities as mediums of exchange where they have been available. It is no accident that this has been the invariable success story of precious metals, which can be partly explained by their superior stable nonmonetary demand, their high value per unit weight, durability, divisibility cognizability, and the other virtues described at length in the first chapter of all money and banking textbooks published before the U.S. government abandoned the gold standard in 1933. Which metal should be the standard, then, silver or gold? There is, indeed, a case for silver, but the weight of argument holds with a return to gold. Silver's increasing relative abundance of supply has depreciated its value badly in terms of gold, and it has not been used as a general monetary metal since the nineteenth century. Gold was the monetary standard in most countries until 1914, or even until the 1930s. Furthermore, gold was the standard when the U.S. government in 1933 confiscated the gold of all American citizens and abandoned gold redeemability of the dollar, supposedly only for the duration of the depression emergency. Still further, gold and not silver is still considered a monetary metal everywhere, and governments and their central banks have managed to amass an enormous amount of gold not now in use, but which again could be used as a standard for the dollar, pound, or mark."

It's a long answer to a simple question but these are complex issues.

Regarding your last two sets of questions, you are 100% correct in your assumption that this is shorthand for reigning in the Fed. I'm one of those fringy anarcho-capitalists who prefers to abolish the Fed entirely. But we shouldn't get hung up on the Fed since it's something of a red herring -- I'm really interested in reigning in the state itself. The Fed is merely a mechanism that aids and abets the state's expansionist ambitions. Abolishing the Fed and adhering to the gold standard are critical means to (as Lew Rockwell puts it) "tie the hands of the state."

The fiat money system is a disaster on many levels. The government finances all kinds of misadventures (such as war) via the printing press. It's important to understand that the Fed creates "money," but not actual wealth, just as a counterfeiter who prints phoney bills. This system harms us all by inflating away our wealth, savings, and purchasing power. The initial recipients of the money (the state and its partners in graft like Halliburton) benefit at the expense of those who receive the money later in the exchange cycle (after price inflation has set in). You can't have a gold standard with a central bank like the Fed in place and expect true reform. This is all of a piece and must be enacted together to be effective.

We gold bugs believe these actions would effectively limit the state's ability to expand and engage in monetary and policy mischief. Think of it this way: it's like the king in medieval times trying to finance a war without the requisite gold. Having no central bank to print him more money, his options are limited to how much he can tax or otherwise seize (thereby risking revolt from the populace). King Bush, on the other hand, merely directs Greenspan/Bernanke to print him more money and more billions flow to Iraq, which is bad enough right there, but this increase in the money supply causes more domestic harm by making our money worth less.

Fractional banking is no different -- it's essentially creating "money" out of thin air. Rothbard has another excellent analysis of the issue here:

Anyway, I'm sorry to just shunt you off to some of the articles I've linked to on the front page, but you ask excellent questions that I am ill equipped to answer in this limited space (long though it's run already). Questions about the gold standard can be asked in a few dozen words, but the scholarship defending it while criticizing the Fed and fractional-reserve banking is extensive (I think I linked to over 610 pp worth of material just in my post that was intended to have little more than a cursory/introductory flavor).

If you are serious about digging deeper into the issues (especially from the Austrian perspective), I suggest starting with some of the books/articles I linked to yesterday. Rothbard's "The Case Against the Fed" is another good survey (and comparatively brief at around 158 pp).

Holy shit, this is long! Is it really almost 2:30 in the morning??? Time to wrap it up...

Thanks for checking in -- I really appreciate your taking the time to visit and engage in dialogue on my humble little outpost. As mentioned, I'm a fan of your blog and your writing even though we disagree on many issues. I'll be keeping tabs on Battlepanda.


Battlepanda said...

Hi Jason,
Thanks for your reply. I think it is somewhat unproductive for us to argue over the gold standard issue, because it really is the least of our disagreements!

I think what James Hamilton and Brad Delong is saying is that having a gold standard is utterly incompatable with a modern, Fed-led monetary system. It could be argued from a goldbug's perspective that this is a straw-man argument, because the whole point of the gold standard is to limit the Fed's powers severely.

I have not read the articles you linked to because I am lazy. If you can choose just one, which one do you think is the most important to read?

It's interesting to see the Fed criticized for aiding and abetting inflation, when most of the criticism I've seen leveled at it blasts the fed for tightening too much, being too hawkish on inflation.

brad said...

Alas! The gold standard before 1914 was also "a central bank manipulated and inflationary pseudo-gold standard"--cf. the literature on the "rules of the game" and the pre-WWI gold standard. The true Holy Grail "Austrian" gold standard is very hard to find, and impossible to set up in any economy that has even a single bank.

J Ballot said...

Hi Angelica,

At the risk of aiding and abetting your laziness, I'll recommend Rothbard's "The Case for a Genuine Gold Dollar" (it's linked on my front page post). Obviously I think all of the articles are important but Rothbard's piece should address many of your questions.

The criticisms of the Fed for being too hawkish on inflation typically come from proponents of printing (and then spending) even more money. Inflation pretty much begins and ends with the Fed. Rothbard has a great quote on this:

"So: if the chronic inflation undergone by Americans, and in almost every other country, is caused by the continuing creation of new money, and if in each country its governmental "Central Bank" (in the United States, the Federal Reserve) is the sole monopoly source and creator of all money, who then is responsible for the blight of inflation? Who except the very institution that is solely empowered to create money, that is, the Fed (and the Bank of England, and the Bank of Italy, and other central banks) itself?" [emphasis original]

J Ballot said...


Could you please point me toward some specific links or books that expand on these ideas? Why would the gold standard be impossible to set up in any economy with a bank?

It seems as though one's position on the issue of the gold standard rests on politics and ideology rather than economic efficiency. That frustrates holy hell out of laypersons with enough economic training/knowledge to be dangerous. If you're telling me that the Austrian gold standard is an outright impossibility, I need to know why from economic or logistical (not political) standpoints.

Because right now, the status quo inspires little confidence. "Money" is nothing more than paper that we've all agreed has value. But intrinsically, it doesn't. It's not tied to anything of tangible worth. And this situation leads to all kinds of policy mischief and malfeasance by the government. Why is this better than a gold standard?

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