Nothing gets you derided as a crank faster than talking about the gold standard. In the past, I have associated such arguments with lunatics.
But I recently read Murray Rothbard’s “What Has the Government Done to Our Money?” (available for free here), and it makes a lot of sense. I want to throw it open to the readership, then: why not the gold standard?
Clearly, we’re talking theory here, just like we are when we talk secession. Nobody is going back onto the gold standard when the government has most of the gold and has zero intention of cuffing its own hands and preventing runaway inflation — the very thing government will be forced to resort to when all other attempts to deal with the debt have failed.
We’re talking theory.
The traditional argument against the gold standard, I think, is summed up in two arguments, one theoretical and one historical. The theoretical one is that, due to the ever-growing population and thus ever-growing economy, we need a medium of exchange that will keep up with that growth. Otherwise we go into a deflationary spiral. Historically, people argue that countries’ going off the gold standard coincided with their getting out of the Great Depression: those that were never on it were fine, and those that were on it, suffered until they got off. The traditional view is encapsulated in this Planet Money podcast, and depends on the idea that it was scary to have a gold standard because when times got bad, everyone wanted to cash in their money for gold, and there wasn’t enough gold to go around.
Rothbard’s argument is too detailed to sum up in a single blog post, but I think it reveals the fallacy of the historical perspective: after World War I, countries weren’t really on the gold standard anyway. They were on a modified and fraudulent gold standard — one that, like fractional reserve banking itself, relied on the idea that people with pieces of paper representing gold (or deposits) weren’t actually going to cash them in. Rothbard points out that, if you don’t have the gold needed to redeem someone’s piece of paper, it was fraudulent to issue those pieces of paper to begin with.
When we had something much closer to a non-fraudulent gold standard, in the 1800s, we actually did pretty well.
As for the theoretical argument, I’m no economist, but I’m not as scared by deflation as some. Deflation happens in the home computer market, for example — prices are always decreasing for better goods — and somehow we all live. Deflation might be worrisome in a hampered market economy, where unions see to it that wages are fixed and can’t fall below a certain level, and other forms of regulation interfere with the natural operation of the market. But in our theoretical unhampered market economy, deflation doesn’t sound that scary to me; prices and wages might nominally be lower, but purchasing power is likely to be strong, and the economy will adjust.
Collectively, you folks know way more than I do. Today seems like a slow news day, so let’s talk about this. What are your thoughts?