From National Review Online’s David Frum:
What the gold standard really is, fundamentally, is a rule that the nation’s monetary stock should be determined, not by central bankers, but by miners. Why that should be regarded as an improvement by anyone, I cannot understand.
Let me add one final note. Even to treat the gold standard as a live option is to utterly misunderstand modern finance. It can never be restored, even if anyone were foolish enough to try, for a reason brilliantly explained by John Maynard Keynes almost nine decades ago….
It’s all here. (Thanks to T.C.)
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anyone ever read “Keynes the Man”?
lovely chap, that.
From Frum, I inferred:
1. Stability causes instability.
2. A few men can divine the complexities of the universe for the rest of us.
3. It is all right to steal through currency manipulation as those who were best off will be those who are worst off after the correction.
4. It is better to export than import.
5. Those with the most to lose are those with the most.
I disagree with all these especially 5: He says those who only have labor to sell will be the best off? This is nuts. The whole point of fiat currency is that it steals money from laborers. They will relatively increase but that is because asset holders will see their stuff decrease.
Those who only sell labor will be the worst off as imports increase in price.
IMHO, David Frum’s “brilliance” proves (on an ongoing basis) why R’s are just as pathetic and worthless as D’s.
Frum is only regurgitating standar Keynesian econ. I doubt he has ever heard of Austrian econ or read anything on money by Milton Friedman. The main problem with his view on money is that he believes recessions just happen, like car accidents, but no one is responsible. Since no one causes recessions, then the Fed can never do any harm, only good by rescuing us from recessions like FEMA rescues victims of hurricanes.
If the Fed can only do good by lowering interest rates, and never causes harm, why doesn’t the Fed set its rate at zero percent? They don’t because even Keynesians like Frum will admit that the Fed can cause the economy to “overheat” if it keeps rates too low too long, though no one seems to know what “too low” or “too high” means except in hind sight. But what do the Frums of the world mean by the economy “overheating”? I’m guessing they mean that businesses invest in ventures that can’t possibly succeed, and/or that price inflation will occur. But that is very close to the Austrian view. So Frums understand that the Fed can cause malinvestment and price inflation, but they don’t connect the malinvestment and inflation that causes recessions with Fed activity. They jump off the track of logic that leads them to this conclusion and simply declare that recession happen, like tsunamis.
Like the large majority of economists and lay people, Mr. Frum believes that increases in the quantity of the generally accepted medium of exchange, i.e. money, will lead to increased production of non-monetary goods and services. As Mises, Rothbard, and other Austrian School economists, as well as a few other competent economists have demonstrated, this assertion is a fallacy that involves a fundamental misunderstanding of the nature of money.
The viewpoint espoused by Frum is a foolish attempt to obtain something for nothing. However, this viewpoint does provide certain interest groups with significant monetary gain, and lead to additional power, prestige, and well-paying jobs for economic/financial “experts†and for professional opinion molders such as Mr. Frum.
Furthermore, Mr. Frum’s understanding of American economic history is quite distorted, but the expected result from one whose grasp of theoretical monetary economics is inherently flawed.
Anyone who argues that John Maynard Keynes “brilliantly explained” anything that was both correct and original is misinformed, delusional, or a liar.
Mr. Frum and the “National Review†do not support positive change based on sound analysis and reason. Although possessing a modestly different veneer, they are at their core the same power-seeking statists and totalitarians as the left-wingers that they so consistently criticize.
I am young (25) but can easily remember the days when conservatives didn’t describe Keynes as “brilliant.” Oh well, but it really drives me crazy to think that any publication would routinely print economic ramblings from people who have clearly proven that they do not understand economics. What’s worse is that people listen to them. How many of the new Ron Paul supporters can stand up to this stuff? What we need to do is be willing to explain these things to supporters, or they will leave. How about using Meetup groups less for political organizing and more for “ok, you like Ron Paul for his anti-war stance – let us show you what else he believes in.”
I think the easiest way to show someone that the quantity of money is irrelevant is by showing that prices are still fractions and that currency exchanges are simply to bilateral trades instead of barter.
10 hours of work/$100 * $100/ 1 play station = 10 hours of work/ 1 play station
The $ unit cancels out, a simple fact most people tend to forget. As for inflation, a metaphor i use to explain that is a rock dropping in a pool of water. The ripples spreading out represent new money spreading into the economy.
Another way to explain inflation and show why the CPI is not so useful, I pretend that I have a billion dollars in a suitcase and I go to a starbucks in Miami, Fl. Demand goes up and I start cleaning out store shelves. Starbucks raises prices from $4.00 to $40,000,000 per frappacino. Then starbucks spends the extra money on apartments or music cds. Each time money changes hands, prices go up to reflect the new currency. Time passes by between each transaction, and this is the time delay between increase in the money supply and the prices changing. Hence, CPI has a time lag.
Rather lucid explanation.
Keynes did not invent anything more than a thief does, when he invents a new way of picking a lock. Actually, I might be too soft on Keynes, as theft by inflation has been invented before Keynes.
First of all, it is of absolute importance to realize that there shall not be a gold standard. There shall be just gold money and silver money and whatever else you want money, nominated in weights and purity and that is all. This means that to say a dollar equals one twentieth of a troy ounce of gold is to start the theft, which from there on can even evolve in a full blown fiat currency. Why? Because now we need to start controlling those dollars and ways of counting them and ways of calculating their values, when we needed this not to begin with.
The true money is a simple thing. A gold coin that says One Troy Ounce of 9999 Gold. And it makes no other claim. A government is needed to certify this and to provide for coinage and for punishment of counterfeiters.
Now, observe. Let’s say we have true money and not just being spoofed into fiat of it’s earliest stages, – the gold standard.
When economic miscalculation has been made, and capital has been malinvested, there needs to be a correction. Call it a wipe-out of a firm or a globe-wide recession, it is still a one and the same thing, a punishment of malinvested. A prudent saver is not punished, nor is a prudent investor. Only a lazy, a fool, or a gullible get-rich-quick is punished by losing their capital. Not everybody is participating in each-other sins, this is the main result. Individual stakes and individual losses. As in Capitalism. Even if you can find a poor worker who is laid-off because his employer has foolishly malinvested his capital,he is guilty of being complacent in his own job research. To say he is not guilty is to immediately suppose that someone else is responsible for taking care of that worker.
Now, enter the fiat money world. A recession here is not punishing the malinvested and foolish only, but everyone who holds the fiat, and more than that, it punishes prudent saver more than flamboyant spender. Everybody participates in each-other sins, and if there is a variation, it is only and always an upside-down justice where prudent always behind the foolish!
Let’s go back to true money. After the correction, the prudent saver still holds his value, even though the malinvested capitalist is now sleeping on a cardboard. A saver can now buy the wiped-out firm, for a penny on a dollar (so to speak), and that is just as by saving he had correctly forecasted the future and therefore served the society in the best possible way by preserving the capital and making it available when most needed. In fiat world, everyone suffers, even though not everybody is guilty, as in pure collectivism.
Back to fiat world, and we can see that the one who will prosper in fiat implosion is a profligant debtor, who had borrowed up to his eyebrows, purchased real goods, and then paid out nothing but worthless fiat, while a saver got wiped-out by plunged fiat value!
So, I deeply hope, that Keynesians will not inhibit our young readers from seeing the real truth behind the differences of a real money world and a fiat money world, and I however old I may-be by then, but some day I will defiantly dance on the grave of collectivist idea.
Now on the argument of choosing between miners vs. central bankers. On this one I will abstain from going into economic differences as they are obvious, but I would like to touch on the spiritual issues that prevent me from choosing the central banker over a miner. This is probably personal, but I’d rather be emptied by miners than be enriched by central bankers. As one Russian poet has beautifully said: – “I’d rather live by a righteous death than die by slavish living.”
A miner is a capitalist, a central banker is a government employee, and it is a torturous dishonor to be enslaved by an employee who has to sell his life days laboring for a miserable wage or stealing.
Lastly, Keynes was wrong predicting that gold is dead. As long as government is restrained to only service their masters, The People, they have no say in the matter. It is not up to them to inflate or to sell the gold. It is only in a tyrannical state, the government slave, such as FDR, can decide and act against his own master’s rules.
Gold, the one that FDR has stolen from people is still alive and well, and with every central bank plunge protection effort it makes it’s ways towards the people, where it belongs. Keynes is long dead. Such are all small tyrants: Hitler, Stalin, Lenin, Mao, FDR… And Keynes is no different. Dead and nasty looking.
Mr. Frum’s roots are showing. I’m still in Canada, and I recognize that kind o’ discourse.
Consider this statement: “If we have free banking, it means that the big banks will decide who succeeds and who fails, instead of ["the disinterested government in" - assumed] Ottawa. That’s all that freedom in banking means: freedom for the big banks to do as they please to the average Canadian.”
And this one: “If we have a free capital market, that means that Bay Street [Canada's Wall Street, although there are nuances that an American wouldn't pick up from the term] will decide who succeeds and fails. The government will never be let in to remove disparities in a fair and equal manner. The Bay Street Old Boys, most of whom never worked a day in their lives [a fellow Canook should be thinking of Toronto's private schools at this point], will control all of us.”
Same Old, Same Old. He may have felt nostalgic when writing it.
Do these imbeciles actually believe this nonsense? How, by their ‘logic’, is a monopoly in force that actually supports the ruling class, meant to be conducive to ‘freedom’? I’d love freedom from idiots like these, that is what.
Frum’s anti-specie declamation is the logical conclusion of over 30 years of patrician versus individualist conservative elitism, paternalism & just plain arrogance. I re-call early 1975 when American private citizens were for the first time since 1934 allowed by the federal government to purchase, sell & own monetary gold, a development I welcomed at the time even though I took several years to realize government at no level in our federal republic has jurisdiction to expropriate privately owned monetary gold imprimis; FDR & the federal treasury in behalf of the federal reserve system were constrained to seize American private citizens’ legally owned monetary gold to keep Americans from frustrating the legal tender maniacs’ resolve to reduce people to dependence. Americans still in possession of their monetary gold would ultimately repudiate central bank legal tender & irredeemable government issued currency & the FDR administration was not about to be gainsaid on so vital a point of the new deal as even a casual reading of Garet Garrett’s 1938 essay–published 1944–The Revolution Was, collected in his 1953 volume The People’s Pottage, attests.
Some years ago I read an account of the public response to the federal conferral of permission of American private citizens to have access to monetary gold. Predictably libertarians, old rightists, individualist arch-ultra conservatives & other honorable people used the occasion to press with new vigor the case for restoral of a gold specie system. Instead of praising these good Americans cold war conservatives with a vested interest in the problematic prestige of the incumbent Ford administration & its 1976 general election prospects such as Russell Kirk & Richard Viguirie rebuked them! though all these excoriations signally lacked praise for Keynes.
The lesson we individualists should draw is stark: they–neo-conservatives, patrician conservatives, country club conservatives, big government conservatives, rockefeller pseudo republicans, militarists, imperialists, cartelists, mercantilists, national security obsessives, police statists et cetera–hate us for our intelligent advocacy of economic freedom. Enough to enlist Keynes of all figures in their ranks! so much for any claim on my respect they ever had.
The people who believe it don’t see it as you describe it, Anthony. For those people, the ‘tyrant’ is the ruler whose values are inimical to their own. The one whose values overlap with theirs isn’t a ‘tyrant’ but a ‘hero’ or a ‘saint’ or some such.
As far as Mr. Frum is concerned, I don’t know if he thinks that way. Odds say that he doesn’t, as the ones who don’t think like that tend to be pegged as ‘American types’ by those that do.
Frum knows his arguments are silly. He worships the state and its power over individual liberty as any Communist or Facists in the past has done. He favors any mechanism the state has (printing money in this case) to increase state power and it is all the better if his all powerful state can screw individuals in the process.
The other point in his attitude is that ENVY is part of the problem as he is happy that people who may have taken advantage of the increase in money may be hurt by a decrease in money. (All of this stupidly assumes that these folks do not adjust their behavior).
I have just got to say something about the post by “banker.”
He says,
10 hours of work/$100 * $100/ 1 play station = 10 hours of work/ 1 play station
and cancels out the dollars to ostensibly show that inflation means nothing.
The problem is that yesterday it only took nine hours of work to earn a play station. Today it takes ten because the bank created 10% more money to compete with the money you earned and buy things the banker contributed nothing to creating.
Inflating the money supply steals from the workers and even though you can cancel the dollars from the equation, you can’t cancel the change in magnitude of labor required to obtain the goods.
Every day the laborer has to do more work for less goods as the parasitic rent seekers use the printing press to oppress.
As a follow up, I realize that improved productivity of workers expands the economy. If it weren’t for people working “smarter not harder” we actually would have a contracting economy.
The problem the central banks face is how much wealth can they extract from the economy without causing collapse. The way they do this is by adjusting the interest rate they charge for money created out of nothing to serve as a break on inflation. On the other hand, maximizing interest rates is how they line their pockets.
I have a question for this group as I assume you are all better schooled in the monetary mechanism than I am.
What is the process by which we re-anchor the currency to gold? Do we simply fix at today’s dollar/gold ratio (about 1/800 as I write)? Wouldn’t the transition to sound money likely cause a major recession (hence raising calls to re-inflate?). If so how are the effects of this transition mitigated? I am asking this question as one who believes this should happen but a little unclear as to the mechanism by which the transition occurs.
“and cancels out the dollars to ostensibly show that inflation means nothing.”-quote David
I never implied inflation cancels out and you cannot show a clear logical explanation of inflation from that equation. The canceling out of the $ sign simply is a way of saying that the static volume of money doesn’t matter. That is usually an argument against the gold standard (not enough money, etc).
The bottom paragraphs show how to deal with inflation.
@JimK:
1. The standard answer varies, as it depends upon the methodology used. Most advocates of such a return would recommend a much higher price than the one currently existing, becuase the government doesn’t have a hope and a prayer of meeting the burden of convertibility that the present market price would impose. The figure arrived at is a rule-of-thumb estimate of a price sufficient to call out enough gold from private and foreign-government hands to meet the conversion responsibility.
Example: M1 as of the end of last month is 1.365 trillion. The supply of gold, as estimated by the World Gold Council as of 2005, is 3859 tonnes according to Wikipedia. That’s equal to 3,859,000,000 grams, or about 124,069,731 troy ounces. So, at a minimum, the new price of gold that would match M1 would have to be (1,365,000,000,000 / 124,069,731) = about $11,000/ounce. Note that this would be the minimum to cover M1 because not all of the gold supply will be voluntarily handed in. For this ratio to apply, the government would have to withdraw an equal amount of M1 from circulation that it manufactures for the exchanger.
2. My own, unorthodox answer: People are too used to using fiat currency as money, so the idea of using gold as money is too foreign as of now for wholesdale convertibility to be undertook at this time. Before doing so, people have to establish price ratios for monetary gold in the market. Once gold is restored as “street” money, which legally would be barter, then the government has a rough idea what the proper ratio should be. Or, in lief of convertability being pursued, the whole fiat money system could be wound down as obsolete once Gresham’s Law takes hold. (I can dream…)
Dr paul made what I had thought was a crazy remark in his book on Gold. That basically, World War One wiped out the greatest minds of that generation and we were left with a-holes like keynes. It seemed like an ad hominem attack but i think about it sometimes. I mean, if brave people and ideas are lost what’s left? in that or any war
“What is the process by which we re-anchor the currency to gold?”
Great question.Should we hope for a government
to impose it from the top down?Or will it re-evolve
after paper currencies have failed, once and for all? Will The Mises Store be accepting payment in gold and silver soon? Tuition fees at Mises U?
The miners don’t determine the value of a bullion currency in the same sense as the creators of a fiat currency do with that. First, there is a stock of bullion already circulating; that has all sorts of stabilising consequences. Second, what miners do is itself physically constrained and so gets applied in consequence of market forces allocating those resources. Since mining isn’t a monopoly, miners don’t “decide” the value of bullion currency any more than farmers decide whether we shall eat.
I beg to differ. A gold miner is similar to a money printer except that the work is far more difficult and risky. Yet the gold miner is simply adding more gold to the existing supply rather than engaging in the production of goods and services. Historical commentators have admitted that gold rushes caused inflation. But it has been pointed that gold mining wasn’t really methodical until the late 1800s. The fact that gold prices go up in times of perceived crises isn’t exactly inspiring.
The irony is that gold production even qualifies for the Monetarist argument (Keynes aside), that is the desire to increase money 2-3% annually.
Monetarists hate gold because its too ‘costly’ to mine and there will be a money ‘shortage’, but I guess looking at the facts as opposed to spinning theories has always been the hallmark of statist economics.
Central banking is investment socialism, which is why it is on the Ten Planks of Communism. Those who supported it should be ridiculed for being the communists that they are.
Ron Paul should use that as a gimmick…maybe.
Someone reading French could verify the same trend among the right wing over at the website from the “Movement Reformateur”, the so called “French speaking liberal-right” in Belgium.
As the main inspiration for their politics (until april, Belgian prime minister was MR), they recommend Hayek, Nosic and von Mises
!
However, their politicians practically advocate lower ECB rates as a necessary incentive for Belgian GDP, along with euro-weakness. They also seem to deny any possible correlation between M3 and CPI inflation.
Look closer, TLWP Sam. Associated with that risk and danger are physical constraints; more effort to mine gold comes along when there is more demand, so it isn’t comparable to what a fiat banker does. And, a bullion stock damps out the overall effect – changes no longer occur at different timescales to flow on economic adjustments elsewhere (individual countries used to intervene to some extent with interest rates, to keep bullion from rushing in and out, and these effects were faster – but they approximated a zero sum behaviour between countries on that time scale, i.e. there was a near invariant around connected to total economic activity). Gold rushes had a limited and localised inflation effect because of this, getting sorted out between countries. It wasn’t perfect of course, because there were other kinds of economic distortion around.
The problem with the “gold standard” is that it is an imposed system. What if a true free market does not choose gold or silver or platinum for its money? What if it chooses something wholly different and unexpected, as free markets are notoriously prone to do? The typical libertarian would probably be happy, but I suspect the Austrians at in Auburn would be pulling out their beards in frustration.
The gold standard is a system in the same way capitalism is. When it arises naturally it is good, but to impose it on a people is to make a mockery of it. What would anarcho-capitalists do if most people decided to live in socialist communes and use labor chits? How many would long wistfully for a state where they could impose the right thinking of capitalism and gold on the masses?
I suspect that in this modern information age, the need for commodity metals to serve as money is far less than it was in prior centuries. A true free market in money might very well come up purely electronic money, with no gold anywhere but in the electronic circuitry.
David: “What if a true free market does not choose gold or silver or platinum for its money?”
That’s the real point of the gold standard: the market did in fact choose first silver then gold as money more than 2 thousand years ago and maintained it as a preference until states foreced people to use paper money just 4 centuries ago. The state forced people to accept paper money; the market never accepted it freely.
The cost of gold production is a sorry, and dishonest, attempt by monetarists at changing the subject. The cost of producing paper money vs. gold is totally irrelevant to the discussion. The main issue is freedom and free markets. In a free market, the market chooses what will be used as money. Gold miners are just another bunch of producers. They produce a commodity, gold, and offer it to the marketplace for whatever purposes consumers want to make of it. Thousands of years ago, people in the marketplace chose to use it primarily as money and it has worked better than any other object any other society has chosen, and other societies throughout history have chosen a lot of things. At one time, buckskin was used as money in the US, but it survive the long-term requirments of the marketplace.
The gold standard isn’t perfect, but like democracy, it tends to beat all the alternatives.
This has been the most fascinating part of Dr. Paul’s campaign to me. I hated macro-theory when I was studying economics because so much of it didn’t match reality in my view. (I was a cognitive-science micro theory guy until I got my taste of the negative side of the academy and decided practicing law would be more dignified.) I have not investigated the gold standard enough to know whether it is a real solution to some of our situation. But I can’t help but be shocked by how many, like Frum, who probably have no real economic training (i.e., something beyond technical skill in manipulating some models) are refusing to examine a very intriguing question that Dr. Paul raises. I compare it to a doctor who is examining a patient and trying to figure out what’s making him sick. There’s a battle always going on when he comes up with a theory as to whether he’s identified the underlying disease or some other symptom. Of course, there’s an objective criterion to determine which is the case: did the patient get well based on the treatment? Thankfully, our doctors are integrious (and yes, that’s a word, a very old one) enough to pay attention to reality and examine experience.
We have the same with the Fed. But for some reason entertaining the question of whether modern monetary policy is the cause (versus the cure) of our problems is anathema. There’s a refusal to even look. And that’s shocking. That’s a real refusal to think critically.
As for the gold standard, I do think there’s something important to be learned from the fact that silver and gold were chosen as the basis for money for so much of human history. It is worth examining and asking why? That’s a more honest way than those who dismiss the subject altogether. Because the underlying tone to their dismissal is one of arrogance: we are smarter than those rubes back in Roman days. But one need only go visit a place like Rome and look at the still standing structures that they built and realize that maybe they were intelligent people to. So it is worth asking why they chose money. Not to bias the conversation for or against whether it makes sense today. But to examine the why’s so that we can ask them of ourselves.
Personally, I am intrigued by the question of whether the role of beauty had something to do with it. Along with its portability, durability, and constraints on production, I’m truly curious as to whether beauty (which I firmly believe has objective roots) is what led to its acceptance and what led to its stability as a store of value. All that stemming from natural reactions rather than force of law. Now, I’ve never examined the history so it’s only an intriguing question that I’d be curious to examine.
All that said, I have been utterly shocked by how much of a “code” there is in economics these days that subjects are off-limits. Having stayed out of the macro side of the world, I truly didn’t realize the degree to which gold-proponents get ridiculed.
I have only recently started to educate myself in matters of politics and economics and I have some questions.
I am still trying to formulate my opinion on the wisdom of using a gold standard for an American currency. The Mises Institute seems to advocate it but I have some questions and concerns, and I would like to be directed to any specific articles or discussions that might help clarify this for me.
My questions are:
1. If we (the United States) were to have a gold-backed currency, how would we continue to acquire the necessary gold reserves on which to base our currency? Suppose that our GDP were to greatly exceed the gold we have stored as the basis of the currency? Wouldn’t that cause a severe restriction of the money supply and strangle commerce?
2. What if the currency were taken out of the country and used for exchange overseas? (This assumes that all the money supply is in ‘actual’ paper money.) Wouldn’t that restrict our domestic money supply and put the U.S. at a great disadvantage, while the rest of the world benefited from our methods?
3. Wouldn’t it be relatively easy for gold producers, commodity traders and illegal gold traders to secretly manipulate our currency?
It would seem that unless we can think of a way to solve these problems, a gold based currency would offer more problems than a fiat currency that was indexed to our GDP. I know this is basic stuff, but it is pretty obvious that people on this forum enjoy discussing it. I would appreciate any reading sources or comments (even mean ones) to help me straighten this out.
Thanks
I tried emailing you, but you apparently did not enter your email address correctly because it was returned to me as undeliverable. Here is what I wrote:
“I doubt anyone is still reading that thread (as the original poster I get updates on it, which is how I discovered your questions), so you’d be better off posting this question to the forums (the easiest way to get to them is to enter http://www.mises.com, instead of mises.org), where I promise you will get some excellent responses.”
Barkeater, in case the forums prove a bust:
There is no need of a US currency or a UK currency. A free market of money is the better way to go. And likely that would be a precious metal or a combination thereof.
If the world’s wealth happened to increase faster than the extraction of gold, then the value of gold would increase.
Conversely, if the extraction outpaced an increase in wealth, the value of gold would decrease. So far as I know, the only time this happened was in 1849 and during the 16th century when Spain extracted tons of gold from the New World.
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