Yesterday we discussed a recent article from Duncan Weldon that we found in The Guardian. In our continued instruction, we’ll read a quote and examine it.
Most economists now accept that both the Long Depression of 1873 to 1896 and the Great Depression of the 1930s were aggravated by the gold standard. In the 1930s the sooner countries came off gold, the faster they recovered.
This is taken right out of left field, and blatantly refutes the facts; facts that Milton Friedman nailed right on the head.
The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.
Responsible scholarship requires authors to provide at least one example after using the word “many,” and two after using the word “most” to substantiate their claim. Rather than backing up his claim, however, the author continues with another unsubstantiated claim.
A gold standard means that monetary policy and interest rates are set to defend the value of a currency against a metal rather than to reflect economic conditions in the country.
This really shouldn’t make sense. In a way, it does. But it only does from a perspective that presupposes that a country’s monetary policy must somehow control interest rates and monetary supply and values. Let’s take those presuppositions out of the picture though.
Now, we have a free market. As more gold comes into circulation its value decreases, leveling out the playing field. Of course, if there are more people, driving up demand for gold, then the price remains the same. And if the supply can’t keep up with demand, then the value simply goes up, meaning that smaller increments are needed for exchange.
This is the simple equation of supply and demand. It’s self-regulating. Sure, there are times when it moves too far or overcompensates. But it will level out eventually, if left alone to do so. Unfortunately, this is not something that is considered a strong suit with world governments. If they can’t control it, they’ll tax it or wage war on it.
Economically, the case for the gold standard simply does not stack up and yet it still finds very vocal supporters. Fundamentally the case is political rather than financial.
Sigh… Another authoritarian statement with absolutely no authority. The gold standard offers a great reward and the argument is air tight. Interestingly, his concluding statements help us understand this even better. But, before examining them, I have to say that I actually love this previous sentence, “Fundamentally the case is political rather than financial.”
Is it? I really am not sure either way. For those who understand sound economic theory, there is a sense in which the two can’t be divorced. And yet, if a country follows a sound monetary policy, then they enforce a policy that separates politics from financial interests. Whenever the two wed, the offspring is invariably rampant corruption. So, yes, as long as politicians see fit to destroy currencies through their manipulative tactics, of course it’s both political and financial. Once the politicians get out of the way, then it is no longer a political issue. However, in such a scenario any Keynesian efforts must, indeed, be politically motivated.
And now for the finale:
Gold bugs want to see golden handcuffs restraining the ability of central banks to intervene and states to spend, they want to remove any vestige of political control of the monetary system and fix it an arbitrarily chosen shiny metal in order to let free market forces take over. It is therefore no surprise that most gold bugs are to be found on the libertarian right.
Other than the grammatical problems, I would replace “an arbitrarily chosen shiny metal” with “with history’s one true and proven form of money.” Other than that, I could have written these last sentences myself.
For your prosperity,
J. Keith Johnson
The Gold Informant