WSJ’s Greg Ip’s Version Of The Gold Standard Isn’t The Gold Standard
Who knows when exactly, but sometime a few millennia ago people began to specialize. Simplified, some produced wheat, some hunted for meat, and others grew corn. That’s when money came into the picture.
Not a creation of the state, money was just a consequence of specialization but also a driver of it. Producers needed an agreement about value that would enable them to credibly exchange their surpluses with one another. Precisely because the producer of wheat wanted the hunter’s meat, but the hunter didn’t want wheat while craving the other farmer’s corn, money became necessary. It freed people of varying wants to trade with one another.
Crucial here is that production begat exchange for other production. Individuals couldn’t demand things as much as their production of market goods enabled them to exchange their surplus with others who had produced market goods. Money was again the agreement about value that everyone produced in order to get, but their real demand was for what money could be exchanged for.
The same is at work today. Think about it. Whataburger (the best fast food restaurant in the U.S.) likely has zero interest in my writing, speechmaking, editing, books, or anything else I do. If I brought my rhetoric or words to Whataburger with an eye on exchanging them for the chain’s amazing food, I would surely depart hungry.
Thanks to money Whataburger needn’t worry about losing my patronage, and I needn’t worry about not getting to eat its mouth-watering menu items when I’m traveling through the southwest. The reason for that is that my employers, the clients who hire me to give speeches, and the buyers of my books dowant what I produce as a writer, speaker and editor. They pay me dollars, and I accept those dollars given my trust that they’ll be exchangeable for all the things I want in the world, including Whataburger’s incomparable breakfast taquitos.
Which brings us to Greg Ip’s latest commentary about the gold standard. Readers can expect more of it as a consequence of Judy Shelton’s nomination by President Trump to the Federal Reserve Board. Shelton has long been a proponent of money with a commodity definition, and her nomination has some thinking a gold-defined dollar could define her own mission within the Fed. This explains Ip’s Wall Street Journal column.
Up front, Ip surely knows that the Fed doesn’t set the dollar’s exchange rate either in terms of commodities or other paper currencies. And it never has. While there’s an argument that the Fed’s actions impact the dollar’s value, even the latter is debatable. That’s a long or short way of saying that proponents of stable money should curb their enthusiasm. The Fed can’t put us back on a gold standard. Doing so is not in its portfolio.
But even if were, Shelton is not being nominated as Fed Chairman. After that, the Fed operates on consensus. Economists think gold-defined money is low rent; the stuff of mouth breathers. Translated for the happy talkers who think quality money is around the corner, even if the dollar’s exchange rate were a Fed function, Shelton herself couldn’t put us back on the gold standard. Microscopically few in its employ agree with her.
Ip’s not an economist, but he plainly thinks (as nearly every economist does) that the notion of stable money is for primitive minds. At the same time he properly acknowledges that “economists have no monopoly on the truth.” No, they don’t. In fact Ip’s comment is an understatement. It’s said often here, but let’s never forget that the vast majority of credentialed economists believe government spending powers economic growth, that the maiming, killing and wealth destruction that was WWII had a growth upside, plus they laughably contend that economic growth causes inflation. It would be hard to find a more insular profession, and near impossible to find a profession that is wrong as often about everything. Yet economists are very full of themselves. While the Fed’s power to influence the economy is wildly overstated, I’m thrilled to contemplate Shelton inside this monument to fallacious groupthink. It will be fun to witness her methodically dismantle all that her fellow economists believe.
Ok, so Ip thinks economists have no monopoly on the truth, but also supports their contention that a gold-defined dollar could be “dangerous.” Really? How? Up front, for the columnist to say a stable agreement about value would be dangerous is the equivalent of basketball star Kevin Durant saying a stable foot and inch would imperil his 6’11” height. No, a foot just is. By extension, money just is. It’s a veil. It can’t alter reality as a floating measure any more than a floating foot or inch could make Durant short or tall.
Furthermore, it could never be dangerous for producers to have a stable agreement about value to utilize as a medium of exchange. Money’s only purpose is as a way for producers to exchange products, and for those who have no immediate consumptive desires, money is a way for producers to shift resources to others (investment) with an eye on getting more resources back in the future. Money came to be precisely because producers wanted a stable agreement about value. If it’s not stable, it’s not as useful as money. If Ip doubts this, he need only travel to Caracas or Tehran with a wallet full of bolivars and rials. Lots of luck buying things with them. But if relatively stable dollars are burning a hole in his pocket, he’ll suddenly discover access to voluminous goods and services.
Money is trust. Producers exchange products for “money” on the assumption that the money will be exchangeable for equal value. Gold types or “gold bugs” as Ip so dismissively describes them want dollar-price stability with the latter mind. Gold has historically defined money because the commodity itself is so stable. Gold gave money the stability needed to maximize trade among producers.
Yet Ip, as one would expect, misspeaks about gold. He claims that the “appeal of the gold standard lay in tying the money supply to the gold available to back it.” Except that there’s never been a gold standard like that, at least in the last few hundred years. Figure that the stock of gold above ground has historically increased very slowly (usually 2% per year), yet the number of dollars in circulation from the late 1700s to 1900 increased 163 times. Much the same took place in England whereby pounds in circulation increased at rates well above “the gold available to back it.” Missed by Ip is that a monetary authority or private issuer could put money on a gold standard without any gold in reserve at all. Gold’s value as money is its historical stability rooted in unique stock/flock characteristics, not how much a money issuer has in reserves.
Ip’s gold sources misled him, but then gold types are among the most delusional of all about what being on a gold standard would mean. They comically claim that gold-defined money limits government spending and wars. Actually, quite the opposite. It was Great Britain’s adoption of a gold-defined pound that made the government’s debt credible in the eyes of investors such that it could run up massive amounts of debt in pursuit of empire. The gold delusional who think good money limits governments ignore how much more attractive government debt is when the income streams are credible. They also ignore how much more vibrant economies are that issue good money, thanks to good money correlating with abundant trade and investment. Investors always want to lend in size to these countries. So no, good money won’t limit government one iota. Only restraint on the part of politicians and voters will limit the latter.
So there’s the problem. Ip doesn’t properly describe the gold standard, but in his defense he doesn’t describe it properly given the monumental confusion exhibited by most gold-standard advocates. You heard it here: the problem with the gold standard isn’t stable money, but the proponents of stable money who in many ways have no clue what they’re proponents of.
John Tamny is a Forbes contributor, Director of the Center for Economic Freedom at FreedomWorks, editor of RealClearMarkets, and a senior economic adviser to Toreador Research & Trading. He’s the author of “Who Needs the Fed?” (Encounter 2016), along with “Popular Economics” (Regnery, 2015).
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