As I read a recent article from UK’s The Guardian, I was somewhat beside myself. Duncan Weldon opens up in what clearly is an authoritarian, contemptuous and condescending perspective on anyone who espouses a hard asset monetary standard. And, I have to admit, it’s incredibly tempting to open this commentary with a similar sneer toward his argumentation.

One of the great tactics of rhetoric is the ad hominem attack. When the opponent in debate has the high ground, the best way to win is to knock his feet out from under him. When such tactics are successfully employed, the argument devolves into a defense of character rather than a mutual pursuit of truth.

Gary North picked up on this in a Mises.org article and offers a fairly extensive commentary for readers. His angle is excellent, as his experience in debate coupled with his economic acuity help him to see this argument for what it is.

First, I want to be careful to not shame young Duncan Weldon. He’s studied hard and really thinks he understands economics. He’s been indoctrinated into a theory of economics that supposes that economies are better run under the ministrations of central banks than the natural forces of free market capitalism and a hard asset monetary standard.

Crawling through the condescending rhetoric takes some effort, if you care to read the article. After reading for some time, we finally get a tidbit we can sink our teeth into.

“At present, as the economy grows and produces more goods the central bank can expand the money supply to keep up with output. Under the gold standard, as output increases, the money supply will be fixed and with more goods but the same amount of money, prices will tend to fall.”

From this argumentation, I am assuming that Weldon has never studied Austrian Economic Theory. Of course, I could be wrong. But his grasp of the underlying argument appears to be flawed. In fact, this seems to be the fulcrum of his case. So, we’ll simply camp here a bit and let the reader take over if they choose to dig further.

His point is that the central bank can increase money supply as the economy grows. This is true. In fact, it’s exactly what they do. However, the thought process is a bit backwards.

As we’ve discussed before, deflation is the enemy of central banks. They cannot expand on their program if demand for their currency is not kept up. In order to keep deflation from happening, they embark on a journey of continued and sustained inflation. The goal, of course, is to keep it just high enough to avoid deflation, and yet low enough to keep it from being too noticeable.

Currently, the number for the FED is in the 1% range, with 2% being the maximum. And, as we’ve also mentioned many times before, this range is figured with a CPI formula that is unique and highly suspect.

In order to accomplish their goals, the FED not only increases the monetary base to match the growing economy, but precedes it. The monetary base is ever increasing (inflation), meaning that the perceived size of the economy is growing as well. If we have 2% inflation on a $1 million economy then the perceived growth is $20,000. However, in such a circumstance, all things being equal, the value of the $1,020,000 is the same as the value of $1 million was last year.

On the gold side of the equation, he’s correct. However, why he sees this as negative is beyond reason. And, he’s only correct in so much as more gold is not introduced to offset the increased demand.

What’s the real problem here though? So prices decrease? If the value of the currency is increasing, this is what we should expect. Why is that a problem? If the purchasing power moves up, then savings gain value as well. With the current system, savings are always losing value. There’s no incentive to save. Under a hard asset system, saving is encouraged and generally rewarded. At the very least, hard assets remain valuable according to their intrinsic value; a claim that fiat currencies can never make.

Because of the bent of the rest of the article, we want to revisit this tomorrow. Until then –

For your prosperity,

J. Keith Johnson
The Gold Informant