Monday, March 26, 2012

The Gold Standard? (sigh)

I am at LEAST a third generation hater of the gold standard.  I had grandfathers who tried to making a living growing food in Kansas and Minnesota which put them both squarely in the middle of the organized fight against the gold bugs.  My mother's father worked actively for congressman Lindbergh—a man perhaps best known for his speeches and a book against the Money Trusts.  My father's father farmed in Kansas—home to perhaps the most intellectual wing of the People's Party and one of the prime stomping grounds for Nebraskan William Jennings Bryan of the famous "Cross of Gold" speech.

Farmers hated the gold standard for a wide assortment of reasons but one of the primary complaints was gold's inflexibility.  When farmers brought their crop to market in the fall, an inflexible currency would cause a shortage of money which would drive down prices.  For the farmer, this defeated all his hard work.  For the robber barons, this was gold's main feature.  So out here in the heartland, the abolition of the the gold standard was priority #1 for farmers and their political organizations, from 1873 when USA went back on a very harsh version of the gold standard, to at least 1933 when Roosevelt REALLY modified the gold standard by making it illegal for USA citizens to hold gold.  Nixon drove the final nail in the coffin in 1971 when he closed the international gold window.

So a legitimate question could be asked, "Did the People's Party ultimately win a major victory?"  After all, if there is no gold standard, shouldn't the currency now be flexible enough to accommodate the needs of the real economy?  Well, in theory monetary policy should work like that now that money is information on a server somewhere.  And yes, electronic money is indeed more flexible.  But keep in mind the central demand of the agrarian monetary reformers was for democratic control on the creation of money—so even winning this minor detail would have hardly satisfied my grandfathers.

Unfortunately, since the primary function of money is to convey information, there is nothing that says electronic money cannot be just as onerous and regressive as the old gold standard.  If fact, as is argued below, that is exactly what is happening.

Actually, There Is A Gold Standard Today, And It's Causing An Economic Catastrophe
Joe Weisenthal | Mar. 20, 2012

Thanks to Ben Bernanke's lecture today, the gold standard is back as a topic for debate.

While it's easy to talk about the endless crises under the gold standard days of the 1800s, the truth is that we don't have to go back that far at all.

Europe is a close analogue to a gold standard.
  • Remember, each European country lacks the ability to print their own money.
  • All the European countries have a fixed 1-to-1 exchange rate, with no ability to devalue their currencies to correct trade imbalances.
  • The currency is designed to keep governments accountable, acting as a check on uncontrollable spending.
  • Countries have to raise through taxation or the bond market a certain amount of Euros each year to spend.
Bottom line, it's a hard money scheme in sheep's clothing.

And in fact, the crisis is almost exactly as Bernanke described.
  • Countries are vulnerable to the whims of speculators.
  • At the worst possible time for the economy, interest rates are rising.
  • When things were good, rates got artificially low for places like Greece and Italy, creating a bubble.
  • The policies of one country end up hurting other countries. So for example, German anti-inflation policies end up doing damage to Greece.
And oh yeah, major bank failures and seemingly endless panic.

Things have calmed down a bit, thanks to the ECB getting a bit more fiat-ish in its approach to money. But if you want to see what it's like when you have a hard, unprintable currency that's designed to keep governments in check, you can just look at the Europe crisis. more
And here we see someone at The Economist try to fend off the modern gold bugs. Essentially their argument is that so long as electronic money can be made to act like gold, why would we want anything else.  If the banksters are manipulating the currency, it's better for them if they have total (push-button) control over money creation—the better to screw the peasants.  This is hardly a cross of gold speech even though it does cast the gold bugs as quaint and old-fashioned.

Just a reminder, you can read my extended monetary argument here.  It's a LOT better than The Economist.  Even so, this is about as enlightened as is possible and still represent the interests of the bankster classes.

Face It: Money Is Technology, And We Can Do Better Than Gold

Matthew Bishop and Michael Green, The Economist | 23 MAR 12
The following is an excerpt from In Gold We Trust? The Future of Money in an Age of Uncertainty (reprinted with permission of The Economist).  
Chapter 6: The Golden Question

Money is a matter of faith. Bits of paper and computer bytes change hands billions of times a day as a measure of value because we trust the promise that they represent. In today’s era of fiat money, those promises rest ultimately on a guarantee by governments that they are valuable. That guarantee, as we have seen, is being questioned as the willingness of governments to live up to the promises of fiat currencies is called into question by the deterioration in public finances.

Gold, as an alternative form of money, is based on a different faith – that the intrinsic qualities of this special metal mean that it will hold its value, at least better than fiat money. The clash between the followers of these two economic faiths is, perhaps unsurprisingly, heated and intemperate. For gold bugs, the time has come to end the heresy of fiat money and return to the one true old-time currency. The defenders of fiat money, on the other hand, treat any questioning of the status quo as, atbest, kookiness and, at worst, dangerous extremism. Both are wrong.

To treat the debate about the future of money as a battle between economic truths is to misunderstand the nature of money itself. Money is not something absolute. It is a technology that has changed over millennia to meet our evolving need for a unit of account, medium of exchange and store of value. That technology has had to adapt to changes in the real world. The rise of democracy drove the abandonment of the gold standard as a monetary system that, though it protected the value of money, was too rigid for modern welfare states.

Just as democracy made the gold standard obsolete, so the world is now going through changes that, in this century, may turn national fiat currencies into a curious anachronism, like the horse drawn carriages that cart tourists through the streets around Manhattan’s Central Park. To understand gold, we need to understand the challenges that our current monetary system faces and what people will want from the technology of money in the future.

The financial woes of many of the governments that issue currencies is the most immediate and obvious problem with the current monetary technology. This is a crisis that exposes the inherent contradictions of money. A return to the gold standard might restore money’s soundness but at an enormous cost in economic growth, wealth and employment. Even getting back to where we were before the crisis, with public-sector borrowing under some control, would take an extraordinary andunprecedented drive by governments, and even that might not be sufficient fully to restore trust in their economic competence.

Even if America’s politicians could set aside the squabbling that has marred the debate about the deficit for too long, it is not even clear that they have much incentive to take the tough decisions. What is in it for political leaders to risk provoking the ire of voters who do not want to hear that the party is over? Likewise, whilst the German public may want sound money, it is not clear that the overall combination of incentives guiding leaders of the Eurozone countries support that outcome.

An alternative strategy, to undermine money’s store of value function through allowing or actively pumping up inflation, is a tempting way for governments to solve the problem of their spiralling indebtedness. This was an option they took once before, in the 1970s, until the public demanded tough policies to control the supply of fiat money. That was then. As governments take risks with the value of money through massive experiments such as quantitative easing, the system of national monetarymonopolies of fiat currencies may increasingly be challenged by capital markets that respect no national borders. We now live in a globalised world, where citizens are better able than ever to avoid and protect themselves from such governmental control. more

1 comment:

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