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Source link: http://archive.mises.org/20844/lv-sun-gold-standard-is-dangerous/

LV Sun: Gold Standard is Dangerous

February 1, 2012 by

With the campaign carnival stopping in Nevada this week for Saturday’s Republican caucus, the Las Vegas Sun’s J. Patrick Coolican takes Ron Paul to task for Paul’s call to end the Fed and return to gold. Coolican writes,

To start with, inflation is not a problem right now. The Fed has effectively controlled inflation since Paul Volcker, who was appointed by President Jimmy Carter, began to rein in inflation 30 years ago. (Most important, inflation rates have been stable and predictable, which allows for economic planning by firms and households.)

Let’s see, Tall Paul left the Fed in 1987. Using even the establishment’s numbers via “The Inflation Calculator” what cost a $1.00 in 1987 cost $1.89 in 2010. So the value of the dollar has been cut in half just since 1987 using the most conservative numbers. What’s stable and predictable about cutting the value of the dollar in half?

Coolican doesn’t understand what all the fuss is about concerning the tripling the Fed’s balance sheet (he writes that “the Fed has tripled the money supply” since 2008 which isn’t right M-2 is up 29%). He says prices have increased 1.5% per year. What’s the problem?

Even according to the government CPI increased 3% over the past 12 months. If one calculates CPI the old fashioned way as John Williams does on Shadowstats.com, price inflation is running at more than a 10% clip.

Coolican then enlists the services of UNR economist Elliott Parker, who says monetary matters were a mess before the steady hand of the Fed came to be in 1913. “It’s an absurd argument because before the Fed prices were unstable in the short term, and long term there was a long period of deflation,” says Parker.

Look at any historical long-term chart of the CPI and it’s a flat line until heading skyward starting in 1971. And what’s so bad about falling prices for a long period of time. That’s how we all become better off is when goods and services become more affordable through technological improvements.

The long depression Parker talks about (1870s to 1900) was actually a period of great prosperity. This period of the classical gold standard was marked by gently falling prices leading to increased productivity, raised living standards, and the first glimpses of globalization.

Jim Grant of Grant’s Interest Rate Observer writes, “you can look far and wide without finding a decade so ebullient, prosperous and — in so many ways —so modern as that of the 1880s.”

While prices fell, the US economy prospered. Industry expanded; the railroads expanded; physical output, net national product, and real per capita income all roared ahead. For the decade from 1869 to 1879, the real national product grew 6.8% per year and real-product-per-capita growth was described by Murray Rothbard, in his History of Money and Banking in the United States: The Colonial Era to World War II as “phenomenal” at 4.5% per year.

And no there was no Fed back then to bail out Wall Street, so malinvestment was liquidated quickly and in turn the economy recovered quickly. So while Coolican says, “The world would have collapsed without aggressive action by the Federal Reserve.” The financial world needed to collapse and hasn’t been allowed to as the Fed continues to prop it up. Thus, the pain continues.

Coolican and Parker think falling prices create less incentive to produce. But they leave out the cost side. As costs fall through innovation, profit margins remain. All inflation does is hide inefficient producers. As for the worry of wages falling, it’s not the amount of your wages, but how much will your wages buy.

But the hundreds of years of evidence supporting gold money doesn’t convince Parker. He says, “But there is no evidence that getting rid of the Fed and replacing it with private banking along the lines of a gold standard would help the economy at all. None. In fact, the idea scares the hell out of me.”

Another reminder of the quality economics training that students are receiving at our nation’s universities.

{ 46 comments }

Ned Netterville February 1, 2012 at 11:13 am

Gold money (not some government decreed gold standard) without the Fed and without government approval will supplant the fiats in due course to scare the hell out of Coolican. So cool it Cool, and excuse the vague reference to the jerk who stole Americans’ gold, but the only thing you have to fear is fear itself. Take a valium.

Michael Carrasco February 1, 2012 at 11:18 am

Great article. I am a firm believer in the Austrian school of Economics ever since I read The Road to Serfdom in high school. I went to college for economics and I had to stop because life happened. I am considering a return but I want to make sure that the university I attend focuses on the Austrian method. Does anyone know of some options?

Thanks,
Michael Carrasco

Capn Mike February 1, 2012 at 12:26 pm

Auburn, George Mason, Loyola New Orleans, Loyola Baltimore (DiLorenzo)

Dave Albin February 1, 2012 at 12:55 pm

Northwood University, Grove City College, maybe Hillsdale?

J-Porch February 1, 2012 at 2:15 pm

Plug for Grove City here. It’s not the small community college it sounds like. I’ve just graduated from there (not econ, computer science and math) but I was able to get some good Austrian coursework in and had several friends in the econ department. It’s a great school and they really do put a lot into the advancement of Austrian Economics.

Ned Netterville February 1, 2012 at 10:01 pm

King Juan Carlos University in Spain, I would guess, since it is home to noted Austrian economist Jesus Huerto de Soto.

GregG February 1, 2012 at 12:16 pm

“And no there was no Fed back then to bail out Wall Street, so malinvestment was liquidated quickly and in turn the economy recovered quickly. So while Coolican says, “The world would have collapsed without aggressive action by the Federal Reserve.” The financial world needed to collapse and hasn’t been allowed to as the Fed continues to prop it up. Thus, the pain continues.”

Just like the Interior Dept won’t allow the forests to burn and renew themselves in a natural cycle, the Fed can’t allow the bad actors to be punished by failure. Too bad for them the market (or what passes for one these days) and nature don’t confine themselves to rules dictated in the schemes “of mice and men.”

Taylor February 1, 2012 at 12:20 pm

Doug,

Great post but you might’ve made another key point which is that “stable prices” are not an ideal in the real world of constantly changing human preferences (subjective value). The only way prices for all goods and services could remain stable over long periods of time would be if population remained constant, no progress was made in the quality and quantity of goods and services produced, no one ever wanted to do anything different than they did before and, essentially, if time stood still and nothing happened.

Stable prices mean economic death. This is no ideal, but a nightmare!

Dave Albin February 1, 2012 at 1:01 pm

True, except it would be possible for stable prices to persist in a free market. Some things would not be pushed by market forces to change for long periods of time. However, you are right, most would and prices would float up and down to reflect this.

Horst Muhlmann February 1, 2012 at 12:24 pm

Coolican and Parker think falling prices create less incentive to produce.

Yes. That must obviously be so. Just look at the computer industry. Poor Michael Dell and the late Steve Jobs have (had) no incentive to produce. If only Steve Jobs had an incentive to produce – then he wouldn’t have died of starvation. (Side note: can one insert an “eye roll” smiley in a comment here? That would be useful.)

Isn’t the LV Sun a mouthpiece for Harry Reid? If they don’t like Ron Paul, that’s a pretty good endorsement as far as I am concerned.

Gil February 1, 2012 at 9:07 pm

Dell and Jobs would have walked away if they were indeed getting less and less income per year.

CT February 2, 2012 at 9:35 am

But they didn’t because volumes were increasing.

John P. February 1, 2012 at 12:36 pm

Oh hey we have the forest fire under control. We had to burn the rest of the forest down though.

Michael Dessert February 1, 2012 at 1:30 pm

I seem to recall a “global warming” pundit asking a firefighter in a very leading way about how global warming has caused our fires to be more powerful. The firefighter simply stated that we have become so quick to put out the small fires that now the forest floor kindling is three or four times the normal depth, causing the fires to burn hotter. He then said he didn’t know much about global warming but these fires are this way because we don’t let the small ones burn. We need more economic firefighters that understand the real world.

Core February 2, 2012 at 11:28 am

That is cool. :)

J.R. Fibonacci February 1, 2012 at 1:52 pm

What Douglas French did not do is provide any logic as to why a gold standard would be favorable in any particular way, nor why it had been discarded by nation after nation in recent centuries, nor replaced with a bimetallic standard of both silver AND gold. Maybe a gold standard would be great, but my assessment of Ron Paul is that he lacks focus and lacks a single, unifying issue. Ron Paul does not speak the same language as most Americans- like if he said “Here is the primary focus I have: I will campaign for a new amendment to repeal the amendment relating to income taxes,” people would understand that and might be interested. I’m not saying that is the one, but people can comprehend it: no federal income tax liability, no mountain of paperwork, huge numbers of bureaucrats needing to find productive work, etc….

Bob February 1, 2012 at 2:33 pm

Economic freedom is a unifying issue.

Search the site, the case for the gold standard is make numerous times by numerous people, including Ron Paul.

Topher February 1, 2012 at 4:09 pm

Ron Paul swings two giant policy hammers. Sound money is one. Ending the empire is the other. There are other parts of his platform that carry important ramifications, but if you asked him to assign priority to his planks (which nobody in our insipid mass media outlets ever would) he would rank those two far above the rest.

I don’t think his message can be made any more practical without losing something important. If most Americans truly have lost the ability to comprehend the consequences of fiat money or military expansion, they truly deserve the tsunami of suck that’s coming their way.

Walt D. February 1, 2012 at 6:40 pm

“nor why it had been discarded by nation after nation in recent centuries”.
All Fiat currencies have historically eventually failed. Why do you think it is going to be any different this time round?

FedUp February 1, 2012 at 9:07 pm

“nor why it had been discarded by nation after nation in recent centuries”.

So that the governments can spend, spend, spend, and spend some more, that’s why.

CT February 2, 2012 at 9:37 am

Nation after nation discarded the gold standard because they wanted to spend money they didn’t have …

Robert Fellner February 1, 2012 at 2:26 pm

Doug,

I believe we are neighbors in Las Vegas? I would propose challenging Mr. Coolican to an academic debate on the merits of central banking as opposed to free market money. I’d be happy to do so, but figured you would probably do a much better job as well as having a much greater chance of making the debate actually happen!

Alex February 1, 2012 at 2:47 pm

I live in Las Vegas and yes, the Sun is basically a mouthpiece for Harry Reid. I posted a rather long comment on the article under the name sigurrosuntitled, located here: http://www.lasvegassun.com/users/sigurrosuntitled/comments/

What do you think?

Topher February 1, 2012 at 4:17 pm

I thought your comments represented the Austrian view nicely. Thanks for pushing back against the idiocy.

Eric Parks February 1, 2012 at 3:13 pm

Not trusting government numbers, I track my own basket of goods from the grocery store; 33 regular bought items. In two years, those items have risen in price by 32% Some prices went up while other items sported new packaging which shrunk the quantity. Simple non-statistical me, I didn’t bother to calculate things like geographic weighting, hedonics, or seasonality, nor did I use any intervention analysis. It is what it is.

Then again, no one is using my calculation in the GDP price deflator, now are they?

Mitch Kordonowy February 1, 2012 at 3:26 pm

@Eric Parks, you should have also noticed that the volume(s) of the individual good(s) has decreased as well, i.e. A 99 cent bag of Frito’s is half an oz smaller, what was previously a 64oz carton of Tropicana OJ is now 58oz etc…
This can be proven simply by the UPC codes—they must be change to be scanned correctly in the given POS system.

Mitch Kordonowy February 1, 2012 at 3:30 pm

I cannot edit my first reply, it is in digi land apparently.
I should have thoroughly read your statement, so I could therefore agree 100%

Eric Parks February 1, 2012 at 4:05 pm

@Mitch,

I skip sometimes too. So much to read, so little time.

Many packages have shrunk but some name brands boast about their ability to keep quantities the same. Blue Bell Ice Cream prides itself on its half-gallon container while surrounded by 1.5 quart competitors. Jif Peanut Butter’s label proudly boasts that it is “Still 18 Ounces”.

Quantity and quality are both affected by inflation and it’s not nearly as tame as the Vegas Sun’s author suggests.

Walt D. February 1, 2012 at 4:59 pm

Obamunism Slogan.
Expect Less – Pay More
Sort of like the inverse of Target stores.

Gil February 1, 2012 at 9:11 pm

“The 19th century was an era of unprecedented growth and nothing bad happened” – every Austrian Economonist.

Strange that the average would barely notice the change in the standard of living between 1800 and 1900. Likewise, the Long Depression didn’t exist apparently.

Conversely, strange that the standard of living for the average person between 1900 and 2000 has been immense and the purchasing power of the average paypacket is far greater too.

JChancey February 1, 2012 at 10:10 pm

This is because of the vast acceleration of technological change from 1900-2000 vs 1800-1900. If we had had sound money the entire time the standard of living today would be vastly higher, prices would be lower, etc. The so called “Long Depression” is a statistical fabrication created by the Keynesian idea that falling prices=depression. In fact with a stable money supply and technological improvements falling prices are the natural consequence of economic growth (see the computer industry, etc). And to say that the average person would hardly notice a change in standard of living 1800-1900 is simply false, it was just not as great a change because technological progress in a free market accelerates. Unfortunatly with the gradual elimination of the free market we are also seeing the gradual decline in the rate of technological progress.

Gil February 2, 2012 at 12:54 am

Really? In 1900 most people were still on the family farm and much of their way of living would have been recognisable to a farmer in 1800. Whereas most of us couldn’t imagine growing up in 1900 much less want to. Much of the “low prices” that would have occurred throughout the 20th century would’ve been nominal: you still get paid a dollar a day but what a dollar!

Mrhuh February 2, 2012 at 2:26 am

Strange that the period from 1800-1900 was a a time of relative world peace (with few exceptions such as when the Bankster puppet, Lincoln, started the Civil War), whereas the twentieth century was a time of universal war and genocide it seems.

Gil February 2, 2012 at 11:36 am

Uh huh, the 20th Century saw 5 billion people added to the world.

Inquisitor February 4, 2012 at 3:54 am

Did you read what he said? Or did you just reply in a-factual canards because you’re unable to counter the antidote to your mainstream talking “points”?

no? February 2, 2012 at 5:34 pm

so you’re arguing that technology was held back during 1800-1900?
certainly that was jimmy carter’s fault.

Robin Goodfellow February 2, 2012 at 8:13 am

“Look at any historical long-term chart of the CPI and it’s a flat line until heading skyward starting in 1971. And what’s so bad about falling prices for a long period of time. ”

These two sentences need to be re-written. Is the second sentence meant to be a question?
Why are we starting the sentence with “and”?

Well written article besides this problem that completely screwed up the flow of my reading. It just made it worse when this showed up on csm.com

James February 2, 2012 at 10:40 am

how are the people served if the top elite own the lion’s share of the commodity that backs the currency?

at this point in history the elite families have allegedly hoarded the majority of the world’s gold and Fort Knox is alleged to be empty of gold. So I suspect that a gold standard is precisely what the elite want – but are making a false play in “suppressing” ron paul in order to generate a “grass roots” pent up demand for a gold standard. Yes, gold standard is a dangerous idea.

Daniel February 2, 2012 at 6:22 pm
Ned Netterville February 4, 2012 at 2:15 pm

Daniel, Good video and great way to respond to James, whose analysis is wanting only of facts and logic.

Anonymous February 5, 2012 at 2:10 am

He’s joking, dude.

Core February 2, 2012 at 11:30 am

Very good article. Enjoyed it thoroughly.

Even though I am still learning about Austrian economics..even I grasp some of the simpler concepts like the above article talks about.

I think some people just don’t have any imagination and they can’t connect the dots or something.

Pablo87 February 2, 2012 at 1:26 pm

Another way of thinking that clearly shows that “gold is good”.
Countries (like China and Switzerland) that wish to remain competitive don’t let their currency appreciate. So if the US and Europe are printing money, they will too. Except that while the US and Euro are buying their own ultimately intrinsically worthless debt, countries with no debt (or less) are buying hard assets like Gold, Silver and Oil Reserves. Who is getting richer and who is getting poorer do you think???
See this article in Forbes “China goes on gold binge and world wonders why” http://www.msnbc.msn.com/id/46205510/ns/business-world_business/

better chess players February 2, 2012 at 5:39 pm

“China goes on gold binge and world wonders why”
so Chinese communists will be able to control the gold supply, in case the USA returns to the gold standard.

bill wald February 2, 2012 at 8:58 pm

On the other hand, during the centuries that the world was on a gold standard the working people didn’t have any gold. As the only working class person who reads this blog, I suppose it doesn’t matter.

My Old Man likes to say that an ounce of gold buys a very good man’s suit. It that still true? Neither of us ever bought a very good man’s suit. The only gold he ever had was a wedding ring and a couple of gold caps after a root canal. I have the gold caps but not the ring.

Inquisitor February 4, 2012 at 3:56 am

“On the other hand, during the centuries that the world was on a gold standard the working people didn’t have any gold. ”

Which centuries? Where?

“As the only working class person who reads this blog, I suppose it doesn’t matter.”

There is no such thing as “working class”.

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