In my last post I gave some statistics on banks notes and the existence of specie that I dug out of an old college history book from 1915. I used these statics to paint the picture that there were far more bank notes and bank capital in existence than there ever was specie. In fact the levels of specie were relatively flat between 1815 and 1833 while the number of banks doubled, the value of capital more than doubled, and there was 28% backing of notes on an aggregate level.
The preciseness of these statics doesn’t really matter to the argument I made that backing doesn’t really make that much difference considering the pro-gold economic arguments regarding market effects of the Federal Reserve and inflation. They simply provide evidence that there were notes floating around that substituted for money, among other things, that were minimally backed and provide contrary evidence that the economy was built with the power and soundness of specie.
Take some of the more popular arguments one by one and figure out if they make sense or not.
1) The gold standard will prevent inflation
- It depends on the how it’s implemented. If we keep the Federal Reserve and government monopoly on money it would.
- We should keep in mind, however, that a forced cap on how much money there can be by pegging to gold without the widespread availability of money substitutes only existed for 15 years before it failed. It doesn’t really matter which version of why it failed is true, either the 1920s was inflationary or the Federal Reserve was hoarding gold, just that it did fail and didn’t provide a means to overcome the effects of monetary deflation. At least to me, having people starving in the land of plenty and mass destitution is not an acceptable outcome.
- This version of the gold standard is appropriate when productivity gains outpace the demands on the quantity of gold, and supply side deflation makes up for additional demand from things like population growth or negative supply shocks.
2) Can the Fed
- How would we enforce a gold standard then and what should we do about stability in the price of gold? The success of a gold standard relies on some intervention one way or the other; so if you want a gold standard, you either get the Fed or you get price fixing.
- It would incentivize substitution with bank notes and other things of value in lieu of money, and get us into uncontrolled monetary conditions.
- Some might like uncontrolled monetary conditions of the free market, me being one of them, but then supporting the gold standard doesn’t really make that much sense because it requires government intervention on some level.
3) The Fed benefits bankers and the rich when it starts to inflate
- If we have government money or free market money, bankers have the market either way.
4) Inflation-filled booms and credit expansion cause people to do bad things with their money and the Fed is a primary culprit in this
- Data provided in my previous post show that credit and the monetary base expanded without the Fed on a free market basis. If fact, this gave life to the Whig party, a party that had no other platform that they could gain traction with – they had no ideological grounding knitting them together other than opposition to Jackson and Democrats.
- Not having enough money in existence and disallowing the use of substitutes for everyone to have the opportunity to succeed in a productive enterprise is bad. Do we really want to make the socialist critique of capitalism true?
- Government distortions of markets with incentives are bad (housing bubble anyone?). There’s absolutely no proof that having money makes people do bad things if left to weigh investments on their merits and there is a cost to disincentiving risk.
- How do we prevent people from doing with their money what they will? Shall we have an investment gestapo instead?
- Ups and downs, winning and losing are facts of capitalism. If you don’t like that and would rather tame it by placing a government-sponsored monetary tourniquet on it perhaps it’s better that you find somewhere else to go.
- Never reason from a price change. Supply issues impact prices far more than monetary conditions.
There are more things being said, of course. This is just my first stab at a reality check because the conversation needs to get started about how much intellectual honesty there is regarding the propaganda campaign that has been under way for at least the last three years.
I don’t want a gold standard. It would be the worst thing we could ever do to ourselves. Canning the Fed is optional, but I think that if we don’t do something about public policy choices that are already in place that rely on the Fed to make up for the squelching of demand that results from them, we’ll be in a world of hurt if we get rid of that first. Those are by far worse problems that need to be dealt with because the Fed itself is not necessarily the root of all evil, only some of it.