The surreal glitter of gold

By Lorenzo

Blogging at Free Banking, Kurt Schuler wants us to have a debate about gold (as in the gold standard).

Let’s not.

I will concede that there is, as he states, much superficial dismissal of the utility of a adopting a gold standard. It is also true understanding the dynamics of gold, silver and bimetallist standards are a necessary part of understanding economic history; not merely for the periods when such standards applied but also for understanding what happened after and why. Such understanding requires a certain level of serious reading and thinking about gold, silver and bimetallism standards, if not quite the “necessary dozen books” Schuler specifies as required (though the list he puts up is an excellent one). Brian Selgin has recently made available a very useful paper on the history of the gold standard in the US.

The problem is the pointlessness of engaging in a “debate” when there is almost no chance of getting agreement about what that historical record tells us.

Take Austrian school economist Steve Horwitz’s claim that

If we had a commodity-based free banking system, we would not have had the boom and bust of the 2000s in the first place.

Possibly not, though adding in free banking to a discussion of the gold standard rather muddies the issue. For, under the gold standard it certainly was possible to have a dramatic boom and bust; it was called the Great Depression.  Which makes Steve Horwitz’s further claim:

that a gold standard ties the Fed’s hands is exactly the reason to favor it, not oppose it. The Fed was primarily, though not solely, responsible for getting us in this mess in the first place precisely because its hands were free to flood the market with artificially cheap credit.

somewhat less than persuasive. At this point it also becomes clear that no genuine debate will happen, for defenders of the gold standard will immediately claim against citing of said Great Depression “but that was not a real gold standard”.

Which is true in the sense that the interwar gold standard was a gold exchange standard managed (or rather mismanaged) by central banks rather than the gold specie standard that had prevailed before the Great War.

For I am shiny and powerful

It was, however, certainly a form of gold standard and if such a disaster can happen under any sort of gold standard, so much worse for the gold standard. Particularly given that the quicker economies went off the gold standard, the quicker they recovered (pdf). Even more since the status of central banks would likely mean that only a gold exchange standard would even be considered for re-introduction.

Moreover, the reason the interwar gold standard was not a “pure” gold standard was that such a standard would likely have collapsed much more quickly. It was precisely the massive deflationary risks (of the ugly monetary contraction kind) attendant on going back on the gold standard after the Great War inflations, as Swedish economist Gustav Cassel repeatedly warned of (pdf),  that led to the various measures to reduce monetary demand for gold in the first place.

More broadly, the problems of 1928-32 were just the most intense example of a much wider problem with metal monetary standards — the great vulnerability being on a gold, silver or bimetallist standard generates to the actions of other countries. Whether it is France abandoning bimetallism out of fear of (pdf) newly-unified Germany dumping silver onto international markets as it shifted to the gold standard or the UK being pushed into a lower rate of economic growth by expansion of the gold standard in the 1870s or countries in the goldzone being dragged into the (ugly) deflation (pdf) by the Bank of France and (pdf) the US Federal Reserve in 1929-32 or China being forced off the silver standard in the 1930s due to FDR’s silver-buying program to placate silver-State US Senators driving up the price of silver, again and again being on metal-standard money has created grave vulnerability to the actions of other countries.

But none of this will count, because either the historical record will be disputed or some ideal version of the gold standard will be paraded which, by virtue of being wildly ahistorical (either in its take on the past or its sense of the present or both), will be immune to the burden of history.

Particularly if you add in free banking. But if one wants to have a debate about free banking, by all means lets — the periodically truly appalling record of central banks certainly gives plenty of grounds for such a debate. Just don’t mix it in with the gold standard as that distracts from attention to the performance of central banks.

The gold standard glitters so strongly in the minds of its adherents because you can always turn it around in such a way that all one gets is the bright shine of hope without any of the tarnish of history. For the gold standard of adherents is typically a thing of faith, not of history. One is then dealing with religious faith parading as economics and such faith is not subject to the refutation of mere worldly facts. So, let’s not have yet another round of theological debate parading as economics.


  1. Mel
    Posted September 3, 2012 at 1:05 pm | Permalink

    The Christian Taliban (Republicans) want to look into a return to the Gold Standard:

    “The gold standard has returned to mainstream U.S. politics for the first time in 30 years, with a “gold commission” set to become part of official Republican party policy.

    Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for an audit of Federal Reserve monetary policy and a commission to look at restoring the link between the dollar and gold.”

    Naturally, the prime movers on this are right-libertarians like Ron Paul.

    Now please tell me again why I should regard right-libertarianism as something more than the retarded, atavistic twin of Conservatism? 😉

  2. kvd
    Posted September 3, 2012 at 5:08 pm | Permalink

    One is then dealing with religious faith parading as economics

    I did laugh at the sheer effrontery of that. I’m thinking that both the pot and the kettle are somewhat tarnished, and that it’s a pointless argument as to which does least damage, when both are such leaky vessels. Thanks Lorenzo.

  3. Posted September 3, 2012 at 5:41 pm | Permalink

    [email protected] I am left confused by what you are actually saying.

    [email protected] You are reading way too much into platform rhetoric. When agitation for gold gets to a certain level, one has a Gold Commission. It reports, nothing changes. Reagan went through the motions in 1981. (One can read Anna Schwartz’s reflections here [pdf].)

    There is always one obvious difference between libertarianism and conservatism — libertarians (of whatever ilk) have a direction they want to push society according to some overriding principle. Conservatism wants to maintain the existing social order. In a social order that puts comparatively high premium on liberty, there is an overlap there, hence “fusionism”. But there are range of issues where the tendencies are quite different. (Police powers, foreign policy, social issues …)

  4. TerjeP
    Posted September 3, 2012 at 7:46 pm | Permalink

    Lorenzo – you say that you don’t want us to debate the gold standard. I think we really should. Especially given some of what you have written above. However it’s your blog so fine.

  5. Posted September 4, 2012 at 4:22 am | Permalink

    [email protected] I am actually happy to discuss the actual history of gold standards and their implications. My problem is that I doubt mightily that any such would (usefully) happen.

  6. John Turner
    Posted September 4, 2012 at 5:55 am | Permalink

    I suggest that all those posting bring themselves up to date on Modern Money Theory. Professor Randall Wray’s, “A Primer on Macroeconomics for Sovereign Monetary Systems” will be followed by a second more advanced text by Prof Bill Mitchell shortly. Whenever anyone raises the use of gold as money I tend to recall Section 6 of Ch.10 in Keynes’ General Theory which follows;The General Theory of Employment Interest and Money Chapter 10
    When voluntary unemployment exists the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted the above reasoning shows how ‘wasteful’ loan expenditure may nevertheless enrich the community on balance.
    Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.
    It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan ex¬penditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, un¬employment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labor, is the most acceptable of all solutions.
    If the Treasury were to fill old bottles with bank¬notes, bury them at suitable depths in disused coal¬mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the re¬percussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
    The analogy between this expedient and the gold mines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. Just as wars have been the only form of large-scale loan ex¬penditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress—failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable. In addition to the probable effect of increased supplies of gold on the rate of interest, gold-mining is for two reasons a highly practical form of investment, if we are precluded from increasing employment by means which at the same time increase our stock of useful wealth. In the first place, owing to the gambling attrac¬tions which it offers it is carried on without too close a regard to the ruling rate of interest. In the second place the result, namely, the increased stock of gold, does not, as in other cases, have the effect of diminishing its marginal utility. Since the value of a house depends on its utility, every house which is built serves to diminish the prospective rents obtainable from further house-building and therefore lessens the attraction of further similar investment unless the rate of interest is falling part passu. But the fruits of gold-mining do not suffer from this disadvantage, and a check can only come through a rise of the wage-unit in terms of gold, which is not likely to occur unless and until employ¬ment is substantially better. Moreover, there is no subsequent reverse effect on account of provision for user and supplementary costs, as in the case of less durable forms of wealth.
    Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed did not stale with abundance. The Middle Ages build cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to ‘enrich’ an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

  7. Posted September 4, 2012 at 2:33 pm | Permalink

    [email protected] In future, could you please use the ‘b-quote’ tag, so we can see what is a quote. Also, spaces between paragraphs are much easier on the eye of the reader.

    Having read both Mitchell-Innes and (for my sins) Knapp, I am less than impressed with attempts to create a comprehensive theory out of the latter in particular.

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