Publisher Steve Forbes, speaking to Human Events predicts "a
return to the gold standard by the United states within the next five
years." Why? Because it would "help the nation solve a variety of
economic, fiscal, and monetary ills."
The article continues:
Such a move would help to stabilize the value of the dollar, restore
confidence among foreign investors in U.S. government bonds, and discourage
reckless federal spending, the media mogul and former presidential candidate
said. ...
If the gold standard had been in place in recent years, the value of the
U.S. dollar would not have weakened as it has and excessive federal spending
would have been curbed, Forbes told HUMAN EVENTS. ...
[...] the idea "makes too much sense" not to gain popularity as
the U.S. economy struggles to create jobs, recover from a housing bubble
induced by the Federal Reserve's easy-money policies, stop rising gasoline
prices, and restore fiscal responsibility to U.S. government's budget, Forbes
insisted.
With a stable currency, it is "much harder" for governments to
borrow excessively, Forbes said.
That's all good stuff, Steve. But really? Are you kidding?
In politics, things generally don't happen because they "help the
nation" or "make too much sense." If we lived in that kind of
world, and the 19th century gold standard had so much going for
it, then why do we was it abandoned in favor of the present system?
It was abandoned for political reasons. Factors leading to the demise of
the gold standard were the desire of governments to spend in excess of
politically tolerable levels of taxation, the need to finance World War I and
other wars, and the wishes of the banking for a lender of last resort to bail
out over-leveraged banks when they had insufficient reserves to cover their
losses.
Political reasons have a logic of their own quite different from the kind
of logic that Forbes is using in which good things happen for good reasons.
In politics, interest groups organize to gain influence over the government
and implement policies for their own benefit, at the expense of the rest of
society.
But why does political logic defeat common sense? The public choice school
of economics has given us an explanation of the insidious process by which
the few exploit the many. They point out that concentrated benefits and
dispersed costs lead to rational ignorance. Translating, "concentrated
benefits" are the large returns earned by the privileged groups through
subsidies or bailouts. For each one of us tax players, the cost of any
individual bailout or welfare program is quite small, hence "dispersed
costs." In looking at political action to fight the system, the individual
taxpayer faces the following set of tradeoffs: the time and effort to
understand even one piece of legislation or policy is substantial, and even
if opposition to a particular program were effective, it would only save a
few dollars in taxes. This leads to "rational ignorance," the
decision by most taxpayers that the return to working harder at your job or
just enjoying life is much greater than the return to political organizing.
Given a outcomes that are dominated by public choice logic, the monetary
system will not be reformed when "it makes too much sense" to do
so. It will not be reformed because that would put government finances on a
sound footing, nor to restrain war-making. Stabilizing the dollar won't do it
either. The current monetary system (or as James Grant calls it, non-system)
will be replaced, eventually, because it will fail, catastrophically.
What will the alternative to the current regime of central banks, floating
exchange rates, and unbacked fiat money look like? Here I must reject the
wishful thinking that "things need to get worse so people will be really
angry and insist on something better." Things do not necessarily get
better when there is a crisis. Things can get worse and stay worse, or get
worse and then go even further downhill.
I'm not sure what Steve Forbes had in mind, because the term "gold
standard" is used differently by different people. The most conventional
definition a system of national currencies exchanging at fixed rates, with
central-banks, each one having some gold as a reserve asset. In
this world, central banks are obligated to provide a form of convertibility,
though reserves held may be less than 100%. Individual nations may, under
some conditions, be able to devalue their own national currency relative to
the fixed rates and to gold.
For adherents to Murray Rothbard's theory
of banking, the gold standard means gold as money proper with banks
holding 100% reserves against demand deposits. Under these conditions there
is no necessity or even any purpose to having a central bank and devaluation
is a form of default.
What does Forbes have in mind? He has been associated
with supply
side economics, who have their own so-called
"gold standard." I say so-called because it is not much of a
gold standard at all, only a rule that the central bank is supposed to manage
the inflation of the fiat money system in line with the gold price. Under
this system, gold is not money proper, it is a good whose price is considered
the best indicator of the looseness or tightness of monetary policy. As Frank Shostak points out, this
system offers none of the advantages of using real gold as money. And why
should anyone expect that when push comes to shove, the Fed will follow any
rule when the situation seems to demand improve comedy? As Murray Rothbard
wrote in his critique of a similar money supply growth rule advocated by
Milton Friedman, "Of course, Friedman would then advise the Fed to use
that absolute power wisely, but no libertarian worth the name can have
anything but contempt for the very idea of vesting coercive power in any
group and then hoping that such group will not use its power to the
utmost."
When the current system fails, there are two primary barriers to the
adoption of a better system. The first is the political actors who moved to
abandon the gold standard the first time around haven't gone away. The vested
interest of powerful groups who wish to use the fiat money printing press are
still around; if a new opening appears, the usual suspects will apply for
their jobs back. That which has not killed them has made them stronger
But the a deeper obstacle is ideology. Most economists and central
bankers believe that a) an economy cannot grow without an increasing quantity
of money, b) the gold standard caused the Great Depression, c) The Fed
determines monetary policy, a necessary and beneficial function and, d) the
banking system (and maybe the auto industry too?) needs a lender of last resort
in the case of financial crises, you know, those crises that just sort of
happen, that come out of no-where with no warning and hit us when we least
expect.
None of the preceding propositions are true, but as long as they are
accepted factoids, the next monetary system is likely to look a lot more like
the current one with extra lipstick than anything that existed in the 19th
century.
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