In response to my question: ‘why in the world would you want the government involved in money?” a reader asks:
Why do you think the founders did?
“But, ultimately, the thing that pushed Coke off its 5-cent price was abandoning the gold standard, and the resulting inflation. It took a few years, but the prices of the inputs eventually rose to such a degree that Coke had to raise its price.”
How much have computing prices changed since we left the gold standard?
But lastly, how is setting a gold standard not the government having control?
My response was rather long, and since I spent some time on it, I thought I would turn it into a post, which expands on some points I have already made, reinforces others, and hopefully answers a few related questions some of you have had.
It is good to remember that there was quite a bit of disagreement on various topics among “the Founders.” I think they tend to be treated as a lumpy whole these days, probably because the disagreements that they had amongst themselves seem to pale in comparison to the difference between the ideals they shared, on one hand, and the support for an oppressive central government that so many accept these days, on the other.
The gold standard acted to brake some of the excesses back then. As Walter Williams has observed: “Our founders feared fiat money.” They had good reason to; during the Revolutionary era, states issued paper currency not backed by gold, and the Continental Congress issued Continentals, which were later famously worthless for various reasons, including British counterfeiting, and the colonies’ decision to continue to issue fiat money backed by nothing. (Governments like to inflate during times of war.)
Government control of coinage in a gold standard system is quite different from wanting the government to control the money supply in an era (today) completely untethered from any mechanism that can serve to brake government’s natural and historic tendency to debase (inflate) the currency. Government-caused inflation expands governmental power and reduces (or, as today, merely delays) the consequences of irresponsible borrowing.
The primary money controversy in the days of the founding, I believe, was the argument over whether to have a central bank. Hamilton favored it. Jefferson and Madison opposed it — but Madison eventually gave in once the precedent was established.
Soon, Jefferson was warning: “We are to be ruined by paper, as we were formerly by the old Continental paper.” He warned of a “bank bubble.” Soon enough, we got the Panic of 1819, and a call for hard money. But it never happened — at least not in a pure sense — and the 1800s had bank panics (largely resulting from state laws preventing banks from having more than one branch!) and other government interference with the free market.
As for the question: how is setting a gold standard not government control? read my last few posts. All refer to one I did on the history of money, and how the gold standard arose. But I’ll explain it again, briefly.
The idea is that the gold standard arose, as money must, organically — within the context of a free market demand for a medium of exchange to facilitate what are essentially barter transactions between people who have created wealth by supplying goods or services others want. Government simply providing a currency that is based on a certain weight of gold creates no immediate concern. The worry is over the potential for abuse — because government has incentives to debase the currency in ways that the market cannot correct.
The problem arises when government interferes with the unhampered market economy. Specifically, when government monopolizes the right to coin money; passes laws that allow banks to suspend payments in gold (as it did repeatedly in the 1800s); grabs the gold (as it did in 1933); inflates the currency; and the like.
As for computing prices, that is a situation where rapid technological development, together with the laws of supply and demand, create a “deflation” in the price of a particular good so rapid that it outstrips any government effort to control it. I’m glad you brought up the example, because it illustrates the basic fallacy of those who fear deflation, claiming that people will always delay a purchase when prices are falling. Yes, people sometimes wait out a purchase of a smartphone or a computer because they hope prices will fall and quality will increase — but ultimately, just about everybody buys one.
Deflation is not a phenomenon to be feared, I submit, in an unhampered market economy. It is a problem only when government has already interfered in other critical aspects of the economy, such as setting minimum wages, or passing laws that allow unions to force themselves on workers who don’t want them. When wages cannot fall below a certain level by law, deflation poses a problem for businessmen — but when the unhampered market economy can respond to such adjustments, the dreaded prospect that we might have to spend less for a higher quality good, as we do with computers, seems less frightening.
Blaming the free market economy for its inability to deal with deflation, when government has taken away the very tools that entrepreneurs use to address that phenomenon, is obviously unfair. A natural and smooth business cycle should take place when government stays out of economic affairs. Unfortunately, government is seemingly always “here to help” — and so the smooth transitions we should see, never seem to actually occur.
P.S. Another reader writes with a rare expression of support:
Since we’re almost to the point of “Godwinning” this argument, I thought I’d let you know that you’re doing an excellent job so far in defense of the gold standard. I appreciate the fact that you understand the argument for it well and you’re hitting the correct sources. (Nice point about the contradictions inherent in the 1873 “Long Depression”, btw.)
. . . .
Don’t get too frustrated with the fiat monetists. I know that it’s like arguing with a religionist or a progressive but, as Rand put, you can’t force a mind. Just put up your info on the gold standard and let the seeds sprout in receptive minds. Good luck.
I appreciate that very much. As I have consistently said, I don’t claim to be an expert on all this, but I think the ideas make sense, and are (in broad strokes) consistent with my basic political/economic philosophy: that freedom and prosperity are maximized when the government steps out of the way and lets people make their own decisions. While I have always believed in those principles, until recently I took it for granted that they do not apply to government control of interest rates, the money supply, and the like. The Austrian economists have caused me to rethink all that, which is why I consider this series of posts important to me personally.