Monday, March 6, 2017

Good as Gold, I: What’s Good About Gold?


According to a recent report, President Trump is in favor of returning to “the gold standard.”  We haven’t verified the quote, but he allegedly said, “Bringing back the gold standard would be very hard to do, but, boy, would it be wonderful. We’d have a standard on which to base our money.”  The report went on to say that few economists were in favor of such a move.
United States Double Eagle ($20)
It would, of course, have been more accurate for the report to say that few economists to whom the media pay any attention were in favor of such a move.  Many Austrian and some Chicago-Monetarist economists think that a return to the gold standard is exactly what the country and the world need.
The problem with a return to the gold standard is that it is just right enough to be exactly the wrong thing.
Obviously, we can’t just make a paradoxical statement like that and leave it there.  We have to explain what we mean.
First and foremost, it is clear that the monetary system in place throughout much of the world cannot continue for very much longer.  There is not a single major currency that is not backed entirely or predominantly with the debt of the government that issues it.  The colossal load of government debt throughout the world is not something that could easily be repaid even under the best of conditions, and current conditions are such that the debt burden will only increase.
The current policy of most governments is, to put it bluntly, monetary and fiscal insanity.  It is a near universal implementation of a couple of fundamental contradictions at the heart of the Keynesian theory of money: that “money” is whatever the government says it is, and it represents a non-repayable debt the nation owes itself.
That being the case (the theory goes), it doesn’t matter how much money a government issues, for it’s just taking out of one pocket and putting it in another.  All debt the government issues is merely a promise to pay itself, what accountants call a “wash entry.”
This is absolute nonsense, regardless how many people got their Ph.D.s in it, or garnered who knows how many awards and prizes for telling politicians exactly what the politicians wanted to hear: that they could spend, spend, spend, and never have to pay the piper.  It results from confusing actual people with the abstraction “the People,” and at the same time mixing up “the People” with the government, and the government with the State.
Thus, most people see nothing wrong with a government making promises to pay, backed by the government’s own promises to pay, that the government then declares it doesn’t have to pay!  After all, this is “MMT” — “Modern Monetary Theory” — the theory on which virtually every government and central bank in the world operates.
You say that doesn’t make sense?  But that’s exactly what it means to back the currency (a promise to pay) with government debt (a promise to pay) that the government (and the economists) say is a promise that the government doesn’t have to keep, i.e., a “non-repayable debt the nation owes itself.”
"Don't look at me. I just told them what to do. They did it."
How did the world ever get into such a mess and mass of contradictions?
It would be easy just to blame Keynes and the Academics.  After all, it was their theories that justified this kind of currency craziness.
But who was it that listened to Keynes and the Academics?
The politicians.
And why?
So they could spend money without being directly accountable to the taxpayer.  They would thereby greatly increase their chances of being reelected, and be able to increase their power while in office.
Dr. Harold G. Moulton
At least, that is what Dr. Harold G. Moulton, president of the Brookings Institution from 1928 to 1952 implied in his analysis of Keynes’s New Deal programs during the Great Depression of the 1930s.  He found that the chief reason governments abandoned the gold standard from the late 1920s onward was to gain control of the currency so as to be able to manipulate the value of the currency for political ends.
After abandoning the fixed standard imposed by tying the currency to gold, a government could create all the money it wanted and back it with its own debt, and not have to worry about whether it was more or less than the market price of gold.  If the government wanted money without taxing, it could raise it much more easily.  In the United States, Keynes’s theories replaced the “elastic” asset-backed currency that had a fixed value in terms of gold, with a debt-backed currency that was elastic (after a fashion) that did not have a fixed value in terms of gold for users of the currency, only for other governments.
It also changed the meaning of “elastic currency.”  Formerly an “elastic currency” meant that the amount of money in the economy increased or decreased directly with the needs of private sector agriculture, commerce, and industry.  Now it meant that the amount of money in the economy increased or (try not to laugh) decreased directly with the needs of government . . . just as the socialist Georg Friedrich Knapp recommended in his “State Theory of Money” that, under the name of “chartalism,” Keynes used as the basis of his theory of money.
Consequently, with a flexible monetary standard and an elastic government debt-backed currency (instead of a fixed standard and an elastic private sector asset-backed currency), if politicians wanted to encourage exports, they could make the domestic currency cheaper in terms of other countries.  They would make up the difference by inflating prices domestically, artificially making foreign goods more expensive than domestic goods to take up the slack.  To encourage imports, they would do just the opposite.  For a combination of encouraging some exports and some imports, and discouraging others, they would add subsidies or tack on tariffs to adjust the buying power of the currency up or down for a particular item, as desired.
Of course, this made other countries angry, even if they were doing the same thing . . . or especially if they were doing the same thing.  One of the reasons Japan declared war on the United States in World War II was because they felt the U.S.’s unfair trade advantage was undercutting their unfair trade advantage in Asia and the Pacific.
You can’t have a flexible standard (an oxymoron, by the way) for the currency and expect to have a stable society for very long.  After all, Sam who pays Fred a dollar for a pound of bread is going to be very irritated with Fred who uses a different standard for “pound” that equals only four of Sam’s ounces.  By Sam’s lights, Fred just cheated him out of 75¢.  And you wonder why countries go to war over such things?
So, if we take President Trump’s comment at face value, it’s not a bad idea.  Part of a government’s job is to define the value of the currency, the same as it would specify the standard of other weights and measures.
Tomorrow we’ll look at why, although having a fixed standard (redundant, by the way) for the currency is a very good thing, gold might not be the best standard.
#30#

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