Wednesday, January 9, 2019

Mathew O'Brien - Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts

Mathew O'Brien has the charts which show that why going back to the gold standard is a bad idea. It's a concise and short article. 
The greatest trick Ron Paul ever pulled was convincing the world that the gold standard leads to stable prices.
Well, maybe not the world. Just the Republican Party. After a 32-year hiatus, the party's official platform will include a plank calling for a commission to look at the possible return of the gold standard. There might be worse ideas than this, but they generally involve jumping off the Brooklyn Bridge because everybody else is doing it.
Economics is often a contentious subject, but economists agree about the gold standard -- it is a barbarous relic that belongs in the dustbin of history. As University of Chicago professor Richard Thaler points out, exactly zero economists endorsed the idea in a recent poll. What makes it such an idea non grata? It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have -- which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up. When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.
Why would anyone want to go back to the bad old days? The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits. It was a devilish device for turning recessions into depressions. The answer is that some people aren't worried about depressions. Some people are worried about inflation. Even when none exists. To them, these fetters are the feature, not a bug. 
It's a simple idea. If governments can't print or spend too much money, prices should be stable. Simple, but wrong.


Konrad said...

“The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits.”

That is an illusion. The gold standard was a gimmick used by politicians to claim that there was “no money” for social programs. Politicians dropped their gold standard gimmick whenever they wanted to create money for war. European politicians dropped their gold standard gimmick in order to fight World War One.

Today no country operates by this gimmick.

It is not possible to actually run a war or a country based on the fluctuating gold market. Moreover monetary systems are what give monetary value to gold. If there were no monetary systems, then a mountain of gold would not be worth a penny, or a yen, or a peso, or whatever.

If an asteroid sent all human survivors back to primitive conditions, then gold would be worth nothing. You can’t eat it, sleep under it, hunt game with it, or wear it as clothing.

As for inflation, it is not caused by “printing money,” but by the ratio of the money supply to the availability of things to buy with money. If there are shortages, then prices rise. That’s inflation. The government can respond by printing more money, or else by removing money from the economy via taxation. During World War Two the rationing of consumer goods caused shortages. Meanwhile there was excess money in circulation because everyone had a job. To offset inflation, the US government had to get money out of the economy. Therefore the US government introduced the federal withholding tax, and encouraged everyone to buy “war bonds.” The government falsely told the peasants that this was necessary to “fund the war,” but the real purpose was inflation control. As always, the war was “funded” by money created out of thin air.

Today there is inflation in housing prices because banks create infinite credit out of thin air. And since bank credit is also debt, the bankers keep the economy crippled.

This nightmare continues because the peasants insist on it.

gene kalin said...

Excellent assessments!

A book I found to be very interesting.

Andrew Anderson said...

Of course needlessly expensive or scarce fiat is bad.

But it is also bad that fiat is created for purposes other than the general welfare but for the welfare of banks and the rich.

It is also bad that the DEMAND for fiat is artificially suppressed in that citizens may not use fiat except for mere physical fiat, coins and bills.

Fix the ethics of fiat creation and use and the moronic call for a return to the Gold Standard shall cease. Ignore the ethics of fiat creation and use and risk its return.

Bob Roddis said...

The post 1913 Fed system is continuously condemned by Ron Paul and the Austrians. More B.S. from the "progressives". Another strawman. Further, the author admits:

It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.

Further, the Great Depression was caused by the monetary system where the fed could inflate even though their notes could be redeemed for gold. This system was and is condemned by libertarians and Austrians.