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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.
Robert Blumen
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