The Better Borrowing Bureau

The gold standard, it seems, is a sort of economic ginseng: a broad-spectrum financial snake oil that purports to cure almost any ill one can imagine. One of the interesting things emerging from the argument about the gold standard is that many of its proponents seem to believe that it will somehow force the government to spend less money, or balance its budget.

I have no idea why they believe this. Is the gold standard going to prevent the US government from issuing bonds? Will Congress have to lower tax rates in order to protect IRS agents from lower back strain? Seignorage, aka the "inflation tax" is not an important source of revenue for the federal government; it's not even a particularly important source of revenue for private banks, which collect most of it. The gold standard will not prevent the government from doing anything--except respond to changes in the demand for money.

Comments

I have no idea why they believe this

And the reason you have no idea is because you haven't studied the history of our departure from the gold standard, and the motivations of the government at various points along the way.
I actually don't favor a return to the gold standard, but it does restrict the government in ways you don't appreciate.
Seignorage and the 'inflation tax' are not the same thing.

Posted by bbartlog | December 20, 2007 2:56 PM

The most important reason for adopting the gold standard is that it would allow Mike Huckabee to deliver his "Cross of Gold" speech, advocating the silver standard.

Posted by Njorl | December 20, 2007 2:59 PM

Megan,

I have posted some respectful posts yesterday and so did some others. You have no responses of your own to any of them. I realize that your agenda is to throw slime balls at Ron Paul. Facts are not important to your posts. So this is my last one and I encourage others ignore megan.

If government borrows huge amounts of money from the savings, under a gold standard, that will leave very little for business to borrow. Interest rates will shoot to the sky. Money will become tight and business will slump and so will the Tax revenues. Government is disincentivised to borrow under a gold standard.

You are a clueless woman. I am just an engineer not an economist, and yet I know these things. A piece of sincere advice - you should stop posting on all matters economic. Focus on some birth control pills and stuff.

Posted by Oil Shock | December 20, 2007 3:04 PM

You know, it might be a very interesting exercise to compare the current outbreak of gold-standard enthusiasm with the debates over the silver standard at the turn of the century. In their root causes they differ, certainly, but both are guided by views of economics spread along non-academic routes, in periods of profound polarization, and with this wierdly populist, anti-establishment tinge... Almost makes me wonder if we'll get a "Cross of Gold" moment at the RNC.

Posted by John | December 20, 2007 3:16 PM

Now you're going after ginseng? You're going to get it now!

Posted by Withnail | December 20, 2007 3:19 PM

Are the pro-Gold Standard comments assuming that the government would have to back all banking system liabilities, and not just the currency in circulation, with gold? Because it's hard to make sense of the theories underlying them otherwise.

Posted by P O'Neill | December 20, 2007 3:32 PM

Oil Shock, the government doesn't borrow money from "the savings," is borrows money from its bond holders. You are a dope.

The gold standard is an attempt by people who can't comprehend the economy as anything other than a zero sum game to punt on monetary policy and turn it into one.

Posted by Jack | December 20, 2007 3:33 PM

If government borrows huge amounts of money from the savings, under a gold standard, that will leave very little for business to borrow. Interest rates will shoot to the sky. Money will become tight and business will slump and so will the Tax revenues. Government is disincentivised to borrow under a gold standard.

You're ignoring the fact that foreigners and foreign countries also buy our debt -- and they aren't on the gold standard.

Posted by Dan | December 20, 2007 3:35 PM

I have to agree that it doesn't look like Ms McArdle is trying to figure anything out, or resolve the silly contradictions in her many posts.

I don't know if she really cares one way or the other about Ron Paul, this is probably more about getting page impressions.

What a waste of time, I thought this was intelligent discussion initially.

Posted by Rahul | December 20, 2007 3:47 PM

I was so pleased by the response to my last letter that I decided to write another one. Don't worry; I have plenty of new stuff to say about Ron Paul and his bedfellows. Before I begin, let me point out that what we're seeing is a domino effect of events that started with Ron stating that people are pawns to be used and manipulated. That prevarication incited his disciples to raise extortionate demands. Jaundiced perverts reacted, in turn, by turning imbeciles loose against us good citizens. The next domino to fall, not surprisingly, was a widespread increase in alcoholism, and that's the event that galvanized me to tell everyone that Ron apparently wants to use us to fulfill his frightful mission. He will almost certainly tiptoe around that glaringly evident fact because if he didn't, you might come to realize that I once told him that his rhetorical performances could profitably be deconstructed in a Dishonest Use of Language class. How did he respond to that? He proceeded to curse me off using a number of colorful expletives not befitting this letter, which serves only to show that after hearing about Ron's piteous attempts to create a new cottage industry around Ron's immature form of statism, I was saddened. I was saddened that he has lowered himself to this level. The facts are in: Ron Paul's jokes are related to the elements and bases of exclusivism both organizationally and ideologically.

Posted by Eliza P. Turnabout | December 20, 2007 3:57 PM

Rahul wrote: What a waste of time, I thought this was intelligent discussion initially.

It sure could have been one. Unfortunately, when the hostess posits a talking point and the respondants refuse to take it up, instead issuing unsubstantiated cannards about "not trying to figure anything out" and "silly contradictions" and "getting page impressions", Intelligent Dicussion quickly falls prey to the Devolutionists.

Posted by anony-mouse | December 20, 2007 3:59 PM

What a waste of time, I thought this was intelligent discussion initially.-Rahul

The problem with Ron Paul's supporters is that they're absolutely convinced that everyone who disagrees with them (like the whole economics profession) is blind to the force of their arguments. It doesn't seem to occur to them that they might just be wrong.

It's not hard to look up what happened when Britain returned to the gold standard in the 1920's. The result was a catastrophic deflation. Were they stupid to do it? Well, stupid isn't the right word. It was, after all, Winston Churchill who was Chancellor of the Exchequer at the time, and he was anything but stupid.

But it was a poor decision. They wanted to restore "sound money", but they picked the wrong way to do it. Even in 1925, the gold standard was what Keynes called "a barbarous relic," that had long since outlived its uefulness.

Posted by rwe | December 20, 2007 4:06 PM

I am not sure what having a gold back currency gives you. Everyone is currenly able to hold gold (or a gold ETF) as a storehouse of their savings. These funds are relatively easy to liquidate so anyone who wants to hold gold as a hedge against dollar inflation is able to do so today. What would be so special about gold backed money?

On the otherhand I have no idea why there should not be private asset backed money allowed in this country. Why not allow competion?

Posted by eccdogg | December 20, 2007 4:11 PM

Megan,

Remember your standards. Stop poking the animals. It's inhumane.

Posted by pct | December 20, 2007 4:13 PM

I have no idea why there should not be private asset backed money allowed in this country. Why not allow competion?

This is the only issue here, and if people keep trying to turn it into something bigger, there is no possibility of debate because we're all going to be talking about something different.

Posted by libertarian | December 20, 2007 4:16 PM

"This is more bad economics. The Phillips curve was rejected in the 70s and well before that by the better economists - namely the Austrian School (von Mises). There is no such thing as a trade off between inflation and full employment. Remember stagflation?"-someone on an earlier thread

This is what I mean the Ron Paul (and Mises)disciples. Economists now broadly agree that the Phillips Curve holds in the short-run but not the long-run. If the Fed starts printing more money, that has a stimulative effect for a while and unemployment falls. In time, though, wages and prices adjust and the whole curve shifts out. So money is neutral in the long run, but not the short run.

It is no refutation if this idea, then, to point to 1970's stagflation. Indeed the late 60's and 70's are a confirmation of this idea. The stimulus worked initially to spur rapid growth, but ceased to work over time...

It's amazing to me that so many people think Ben Bernanke doesn't really know what he's talking about when he speaks about monetary policy. He knows that excessive growth in the money supply fuels inflation. Really, he knows.

He also knows that high inflation is destructive. It's true that he feels an obligation to fulfill his "dual mandate," but it's clear from his belief in inflation targeting that his chief focus will be to control inflation.

Posted by rwe | December 20, 2007 4:22 PM

You're ignoring the fact that foreigners and foreign countries also buy our debt -- and they aren't on the gold standard

In order to buy dollar-denominated US debt, foreigners would have to be holding (or buying) US dollars. So what you're talking about isn't some sort of magical escape from the straitjacket of the gold standard. Frankly, I find this whole conversation somewhat strange - opponents of the gold standard actually *had some good reasons* for abandoning it. But in the comments here (and to hear Megan tell it) we see many who would dismiss the gold standard not for its deflationary aspects, or the hard economic shocks it engenders, but because it would have no effect. Bizarre!

Posted by bbartlog | December 20, 2007 4:41 PM

Alan greenspan - 2 minute clip.
http://www.youtube.com/watch?v=kEZnPtbi77g

Posted by bomb bomb bomb | December 20, 2007 4:56 PM

eccdogg,
The problem with the ETF gold trading stocks is that gold is considered a "collectable". Therefore any capital gains are taxed at a 28% rate regardless of how long you hold it for. In short the government is forcing gold and other potential commodity monies to fight with one hand tied behind it's back. If all Ron Paul wants is some competition between commodities and fiat money, then the only thing that needs to be done is to eliminate the capital gains tax on those few items and if anyone wants to save their money in terms of ETF's it would be very easy to do and to liquidate the stock as needed. And that would be fine. The problems you would have is the problems inherent in any commodity that is subject to the laws of supply and demand.

Posted by H man | December 20, 2007 5:08 PM

A commodity backed money constrains government borrowing directly, but does not restrain government spending in a direct fashion- government can still raise funds through taxes.

Like any real asset, gold is no one's liability. This is the source of its restraint. Government cannot redeem a gold bond by paying back in devalued gold unless it actively debases the gold bullion/coins directly, something that is an explicit breach of contract. In our present monetary regime, all government debt can be endlessly rolled over, or monetized, without breaching contract. The reason this is so is that our currency is debt- every dollar is someone's liability.

Posted by Yancey Ward | December 20, 2007 5:15 PM

The gold standard keeps raising it's ugly head and Megan has done a good job beating it down.

despite the lessons of history, the goldbugs are pretty stalwart in their faith as rwe above describes.

And me, a libertarian economist type, when I talk to goldbugs it is like arguing with a lefty who has one of those "9/11 was a Inside Job" bumper stickers. Can't reason with them.

Posted by Jozef | December 20, 2007 5:36 PM

I think Megan has done a very poor job on most of these posts. The main problem with most gold bugs is that they oversell the virtues of a commodity backed money. Even in the 19th century and early 20th century, the gold standard was only as good as the bank management's integrity in regards to the backing, and the customers' diligence at not being taken to the cleaners- much the same problems we have today with regards to central banks. The currency regime we have today is sufficient as long as it is intelligently and honestly managed, but that is the problem- some day corrupt or incompetent management will destroy the dollar, and when that day comes, the entire economic and political system comes down with it.

Posted by Yancey Ward | December 20, 2007 6:00 PM

Many proponents of the gold standard do not believe in fractional reserve banking (they take the Rothbardian view that it is fraudulent). Eliminating the fractional reserve banking system would reduce the money in circulation by roughly 80% - and thereby reduce the government's budget.

Posted by Gold! | December 20, 2007 6:00 PM

Suggest looking at history of Roman Empire finances before returning to gold standard.

Debasing of currency awfully standard.

Posted by grumpy realist | December 20, 2007 6:03 PM

If in fact Rep Paul is referring specifically to having x amount of gold in reserve for x dollars in circulation, then Ms McArdle is on point.
If it is something else, then she has apparently been mostly off point.
At least, that is how I have seen it as an on the sidelines observer.

Posted by anomdebus | December 20, 2007 6:07 PM

Why is Paul's advocation of the gold standard that much of an issue? All of the candidates have absurd beliefs; Paul's are just less mainstream.

The important question is which candidate is least likely to turn his absurd beliefs into harmful policies, should he be elected. And I think Paul does pretty well by that standard. As far as I know, the President doesn't have the power to unilaterally put us back on the gold standard, and he's unlikely to get Congress to go along with it.

On the other hand, he's likely to act as an effective check on implementation of the absurd beliefs of members of Congress, partly through veto power, and partly through the appointment of judges who understand and respect the Constitution.

Paul may be nutty, but it's a good thing for the president to be nutty in ways that are diametrically opposed to the nuttiness of Congress.

Posted by Brandon Berg | December 20, 2007 6:42 PM

Doesn't anyone get the point? It doesn't matter for squat that there is an open consensus that it requires surprisingly little imagination to envision a future in which Ron Paul is free to provide brain-damaged conspiracies with the necessary asylum to take root and spread. What's far more relevant is that as incredible and bizarre as it sounds, humanity is undoubtedly the victim of a diabolical conspiracy masterminded by Ron to put a clog on all attempts to limit his power. The full truth of my conclusion I shall develop in the course of this letter but the conclusion's general outline is that if he thinks his musings represent progress, Ron should rethink his definition of progress.

We ought to break the mold and stray from the path of conventional wisdom. That'll make Ron think once -- I would have said "twice" but I don't see any indication that he has previously given any thought to the matter -- before trying to reinforce the impression that stultiloquent doomsday prophets -- as opposed to Ron's lapdogs -- are striving to sell otherwise perfectly reasonable people the idée fixe that Ron's vices are the only true virtues. While most people know this like a schoolchild knows that 2+2=4, his den of thieves is the blackest home of tyranny and oppression in the world. I submit that everyone should stop and mull that assertion. Then, you'll understand why Ron holds onto power like the eunuch mandarins of the Forbidden City -- sterile obstacles to progress who spread despicable views. If you agree, read on. Contrary to the impression that savage menaces offer "new," "innovative," and "advanced" ideas, there is little new in their obloquies. What is the most appropriate way to evaluate the tactics Ron has used against me? Education -- the real thing, not the cruel facsimile that Ron promotes in order to feed us a diet of robbery, murder, violence, and all other manner of trials and tribulations. Many of our problems would be solved if only more people were educated to learn that in Ron's rantings, imperialism is witting and unremitting, tasteless and sneaky. He revels in it, rolls in it, and uses it to prevent us from recognizing the vast and incomparable achievements, contributions, and discoveries that are the product of our culture.

If I didn't think Ron would quash other people's opinions, I wouldn't say that he claims that the best way to reduce cognitive dissonance and restore homeostasis to one's psyche is to poke and pry into every facet of our lives. I would say that that claim is 70% folderol, 20% twaddle, and 10% another feral attempt to enslave us, suppress our freedom, regiment our lives, confiscate our property, and dictate our values. Think about that for a moment. It's easy enough to hate Ron any day of the week on general principles. But now I'll tell you about some very specific things that Ron is up to, things that ought to make a real Ron-hater out of you. First off, he never tires of trying to extinguish fires with gasoline. Ron presumably hopes that the magic formula will work some day. In the meantime, he seems to have resolved to learn nothing from experience, which tells us that the last time I heard him ramble on in his characteristically bibulous blather he said something about wanting to introduce more restrictions on our already dwindling freedoms. I feel sorry for the human race when I hear stuff like that. As soon as Ron Paul's serfs trick academics into abandoning the principles of scientific inquiry, their theories will cease to plant markers that define the limits of what is maladroit and what is not and instead will encourage individuals to disregard other people, to become fully self-absorbed. And that's the honest truth.

Posted by Eliza P. Turnabout | December 20, 2007 7:08 PM

I have decided to post one more post. My last one, I promise.

Peter J Boettke of George Mason University has actually taken time to respond to Megan's silly ramblings.

http://austrianeconomists.typepad.com/weblog/2007/12/ms-mcardle-plea.html

Boettke bio
http://www.gmu.edu/departments/economics/pboettke/bio.html

jack says...
Oil Shock, the government doesn't borrow money from "the savings," is borrows money from its bond holders.

And where do you think the bond holders get the money( which is gold ) to buy bonds from ? If it not a permanent condition, You need to sober up before you post your next one.

dan says...
You're ignoring the fact that foreigners and foreign countries also buy our debt -- and they aren't on the gold standard.

Yes they can buy bonds, but they have to do it with gold ( because that's is the money under gold standard ). We were in a similar situation ( even though not an exactly same situation ) during the 60s and 70s. Borrowing money for LBJ's guns and butter. But foreigners came asking for Gold and Nixon had to shut the gold window, which was supposed to be temporary. Nobody keeps lending unlimited amounts of gold to the same entity, and that is the beauty of the gold standard.

Going off of Bretton woods pseudo gold standard was done when we were insolvent, not when we had a gold surplus. It was an act of desperation.

Even the early supplysiders like Laffer and Wanniski wanted a dollar with a stable, narrow trading range in terms of gold.

I would like to know which school of ecomic thought does miss Mcardle believe in? Tone of her posts are full of ridicule, and not of thoughtful criticism. I would like to know what her qualification is to criticize the austrian economists of the like of Hayek ( Nobel Prize winner), Mises, Menger.

Fractional lending is a fraud. Which is the sole cause of all business cycles.

If you have any other fungible commodity like wheat or oil and try doing fractional lending, you will be arrested for fraud.

Posted by Oil Shock | December 20, 2007 7:18 PM

If you have any other fungible commodity like wheat or oil and try doing fractional lending, you will be arrested for fraud.

Why? If somebody drops off a gallon of gas with me and I promise to return it when he asks, why can't I put it in my car and drive, or offer it to someone else to use, so long as I make arrangements to have a gallon to give him when he comes back for it? It would be fraud if I didn't give it back, but not if I actually did.

Posted by Rob Lyman | December 20, 2007 7:58 PM

Mr. Lyman,

Since the post was addressed to me directly, I am responding.

You are confused. Let me introduce to you the concept to fiduciary responsibility. When you loan a gallon of gas to person X with an agreement that he needs to return it in 1 year, the ownership is transfered to person X. He can do what he wants with it until it is time to return. Now let's say you trust person Y for the safekeeping of a gallon of gasoline with an agreement that you could ask for that gallon at any time. Now if person Y consumes it half of it for his personal use and you show up to redeem it, and he doesn't have the gas, then it is fraud.

In the case of gasoline and wheat, it gets used up, where as money it goes right back into the banking system and gives the illusion that there is more money to lend. In that sense, money as a fungible commodity, is a worser case of fraud. Because the phantom money ( ponzi, pyramid scheme ) keeps building up in the system.

This is exactly the difference between term deposits and checkable deposits.

Posted by Oil Shock | December 20, 2007 8:07 PM

In order to buy dollar-denominated US debt, foreigners would have to be holding (or buying) US dollars. So what you're talking about isn't some sort of magical escape from the straitjacket of the gold standard.

Sigh.

Ok, let me give you a simple example:

Step 1: We buy $10 billion of goods from China. China now has $10 billion more in American gold.

Step 2: The Chinese buy a $10 billion in US government bonds with that gold, returnig $10 billion in gold to the USA.

Presto. The gold supply in the United States is unchanged, despite the fact that the government owes $10 billion to foreigners. This is a simple example of why a gold standard will do nothing to prevent massive deficits. The BONDS aren't backed by anything except the goodwill of the United States.

Posted by Dan | December 20, 2007 8:08 PM

The BONDS aren't backed by anything except the goodwill of the United States.

You think they will keep parting with the gold for the goodwill? Is there any historical example of such a scenario, under a gold standard?

Posted by bomb bomb bomb | December 20, 2007 8:19 PM

Now if person Y consumes it half of it for his personal use and you show up to redeem it, and he doesn't have the gas, then it is fraud.

Sure, no disagreement. But if he does have some other gas, or can obtain it rapidly enough by whatever means, then it isn't fraud, because he has fulfilled his obligation to you.

Speaking of confusion, you're confusing a bailment (in which an item is deposited for safekeeping) with a debt (in which there is an agreement to pay something later). Bank deposits are debts owed to you by the bank, not bailments in which the bank agrees to "safeguard" your money for you. The bank bets that only a small fraction of its depositors will show up on a given day, and if it bets wrong, the result is a bank run.

Really, fractional reserves is how banks have always worked. Insurance companies work this way, too: they promise to pay you if something bad happens, but they don't really have enough cash on hand to pay on all those contracts if the same bad thing happens to all of their insureds on the same day. That's not fraud, either, even though both banks and insurance companies have been known to go bankrupt when their calculations fail.

Posted by Rob Lyman | December 20, 2007 8:20 PM

Megan seems to claim NOTHING will restrain government from spending, or overspending.

She doesn't explain why or how?

No one else really has either.
I don't think anyone here can envision what would happen exactly under a commodity backed currency.

I'm not even sure Ron Paul can. Besides, from what I've read he endorses putting commodities in direct competition with the dollar and the federal reserve, not an actual return.

Posted by yer average Paultard | December 20, 2007 8:47 PM

Grump Realist,

A valid point, but debasing a currency metal is riskier today since analysis is much easier.

Posted by Yancey Ward | December 20, 2007 9:25 PM

You think they will keep parting with the gold for the goodwill?

People have been giving us oil in exchange for fiat currency and bonds for decades -- and oil, unlike gold, is of critical strategic and economic importance to the people trading it to us for those fiat dollars. "Parting" with commodities in exchange for pieces of paper backed by government goodwill is exactly what bond purchasers (and everyone else in the world) have been doing for decades. Gold is just another commodity, and an unimportant one at that.

One of the biggest mistakes made by goldbugs is thinking that everyone else in the world has the same religious beliefs about the absolute necessity of holding on to gold that they do.

Posted by Dan | December 20, 2007 9:50 PM

I would also add that unless you actually load the gold onto boats and ship it overseas, foreigners are still trusting the US government to actually give them the gold ingots backing the dollars we've sent them. Since the US government can at any point say "Psyche! We're going back to fiat currency, no gold for you" (as it did 74 years ago), that means that gold-backed currencies are still just backed by the goodwill of the government.

I guess we COULD actually ship all that gold around, but the expense of doing so would be crippling (and it would dramatically slow down international money transfers to and from the United States).

Posted by Dan | December 20, 2007 10:01 PM

Gold is just another commodity, and an unimportant one at that.

One of the biggest mistakes made by goldbugs is thinking that everyone else in the world has the same religious beliefs about the absolute necessity of holding on to gold that they do.

That is a typical monetarist belief. Infact Milton Friedman predicted that Gold prices would reach $6 an ounce if the gold to dollar link was cut for good. We all know what happened since the link was removed.

I would also add that unless you actually load the gold onto boats and ship it overseas, foreigners are still trusting the US government to actually give them the gold ingots backing the dollars we've sent them.

yes they are trusting the government. But not as much as they need to do today. Under a gold standard, they ask for gold a lot earlier than they do now under a fiat. and this statement contradicts with your statement about 1974( which was actually 1971). When the foreigners actually wanted to take their gold.

Parting" with commodities in exchange for pieces of paper backed by government goodwill is exactly what bond purchasers (and everyone else in the world) have been doing for decades.

True. But not to the extent as today, where the notional value of ponzi derivatives traded is over 650 trillion in a 14 trillion economy.

Posted by Oil Shock | December 20, 2007 10:17 PM

Really, fractional reserves is how banks have always worked.

No they always didn't work that way.

Banking system evolved from a fiduciary responsibility of the safekeeping of Gold a.k.a money.

Goldsmith's stored gold and gave certificates in return to the depositor. Depositor would submit the certificate for a withdrawal of gold. Later on the cerificates itself was used as money. Gold smith realized that they can issue more certificate than they have gold on deposit - beginning of a fraud called fractional lending. It was a fraud and was treated as a fraud.

Posted by Oil Shock | December 20, 2007 10:21 PM

Goldsmith's stored gold and gave certificates in return to the depositor. Depositor would submit the certificate for a withdrawal of gold. Later on the cerificates itself was used as money. Gold smith realized that they can issue more certificate than they have gold on deposit - beginning of a fraud called fractional lending. It was a fraud and was treated as a fraud.

As was already explained to you, that's actually an example of bailment.

Posted by anony-mouse | December 20, 2007 11:46 PM

That is a typical monetarist belief.

In the sense that the theory of evolution is a typical scientific belief. Nobody uses gold as currency anymore, "Oil Shock". Not because of a conspiracy by the New World Order or the Elders of Zion or whatever Paul's ranting about this week, but simply because gold standards are idiotic. They solve no problems and create new ones.

yes they are trusting the government. But not as much as they need to do today.

Quite the opposite. The United States government has confiscated physical assets from people and governments countless times. In contrast, it has NEVER hyperinflated the fiat currency or defaulted on a bond. A rational person places greater trust in US monetary policy than he does in his ability to retain physical property.

and this statement contradicts with your statement about 1974( which was actually 1971). When the foreigners actually wanted to take their gold.

I said "74 years ago", not "1974".

Posted by Dan | December 20, 2007 11:50 PM

To Megan, rwe and others that have responded to my comment about 'wasting time' above:

The reason I think posting on Megan's blog is a waste of time is because for a while she followed the logical conclusion of her argument to a previous post on "Okay, so why not competing commodity currencies?" and completely missed the point that competing commodity currencies have been made ILLEGAL by the USA.

In refusing to acknowledge this point, she demonstrates a common trait seen in folks that are not very good with economics or business: in order to save face on prior mistakes, they are willing to continue an irrational train of thought rather than face a contradiction in their assumptions.

All I have to say is this: I discovered the relationship between interest rates, money supply, malinvestment and the value of the dollar over the last 10 years.

And once I put the pieces together 3 years ago, I made a lot of money. It was a choice of being taken advantage of, or taking advantage of the system. I got tired of being taken advantage of.

You guys keep arguing as you wish, what do I care? I have learned how to have the system work to my advantage. That being said, I know the system is a fraud, and I admire Ron Paul for calling it out.

Either Megan has spent too much time in school learning about silly nonsense like the Philips curve (a consistent relationship between inflation and unemployment? hahahaha) to even attempt understanding reality, or she has consciously decided to dig into her prior beliefs in order to avoid saying she was wrong.

I'll continue making money either way, and the world will keep spinning. It would have been nice to have an influential voice on board for RP, but oh well.

Posted by Rahul | December 20, 2007 11:57 PM

Banking system evolved from a fiduciary responsibility of the safekeeping of Gold a.k.a money.

Yes -- evolved, as in "changed". As in "doesn't work that way now". If you want a bank to store your money and not lend it out, they will do that for you. It is called a safety deposit box, and a bank will be happy to rent one to you.

Posted by Dan | December 20, 2007 11:57 PM

Let's not forget how well gold worked for Spain.

Posted by mishu | December 20, 2007 11:58 PM

Fractional lending is what makes economy and science grow at current levels.

Posted by lucklucky | December 21, 2007 12:01 AM

Ok, first off, an essential element of fraud is willful misrepresentation. You have to lie to commit fraud.

Second, the goldsmith you describe is indeed doing something fraudulent: he's issuing debt instruments he knows full well he can never honor. The notes he hands out to depositors represent the gold he stores for them; the notes he hands out to non-depositors (presumably in exchange for something non-tangible, like repairs to his roof) are unbacked by any assets. He's cheating the people who get those notes because they have no value and he can't pay them no matter what.

But as it turns out, that's not fractional reserve lending. Fractional reserve lending is the practice of lending out the gold itself, in exchange for promises to pay. Now the goldsmith has two kinds of assets backing his notes: actual gold, and notes from borrowers. The notes have some cash value which, if the interest rate has been correctly set relative to the interest on deposits and the risk of default, should be equal to the value of the gold lent out. If suddenly all the depositors want gold back, the goldsmith can 1) call in the loans, 2) sell the promissory notes to other goldsmiths, 3) borrow gold himself, backed by the notes from borrowers in his vault, or 4) hand out the promissory notes to depositors, who now assume the responsibility of servicing the loans. These transactions are all equivalent in value; nobody loses anything.

The goldsmith accepts an asset (gold) and gives one of equal value to depositors (a banknote). He then hands out an asset (gold) and takes one in (a promissory note). All of these transactions are close to zero-sum; in each case both parties leave with something of approximately equal value. But the goldsmith serves the important market-making function of matching those with spare money to lend (depositors) with those who need to borrow. And, like an insurance company, he spreads the risk of default around among all his depositors so that none suffer a catastrophic loss in the event that someone fails to pay. Naturally he skims a bit off the top for himself, too.

There is nothing the slightest bit fraudulent about this whole series of transactions, any more than it would be fraud for me to lend you $5 for lunch. The existence of the bank just makes life a lot easier for everyone.

Posted by Rob Lyman | December 21, 2007 12:57 AM

Really, the value of the gold standard has been empirically examined and found wanting. Current Fed Chaairman Bernanke has contributed to the research, cf. his book The Depression. To give an example, France stayed on the gold standard throught the Depression. The French economy had lower growth and higher unemployment than the European countries that did not stay on the gold standard. For further French constitutional reasons in relation to this, the French money supply fell, inhibiting economic growth, trade and worsening the European depression, one of the outcomes of which was an increased opportunity for the National Socialists in Germany.

Posted by Michael Brophy | December 21, 2007 1:22 AM

Ron Paul's run the most successful libertarian campaign in years, but his vocal cadre of deluded supporters -- isolationists, gold bugs, 9/11 truthers, &c. -- have imposed significant externalities on his ideas along the way. So many look backward -- to the good old days of the gold standard, sealed-up borders, and UN-free world -- when they ought to look to the future. That future isn't the gold standard -- it's money as information.

Argue about commodity currency and fiat notes all day, but it's still money, which as any introductory econ student knows, has basic characteristics, whether Benjamins or ingots or cowrie shells. Money makes exchanging goods more efficient, helps us measure prices and value, and allows us to store that value for a while.

As a medium of exchange and unit of account, we can use gold or paper or whatever the hell we want -- though widespread agreement on something cuts transaction costs. But denominate your contracts in pork bellies for all I care -- it still fills these functions.

But if you're still primarily exchanging dolla dolla bills, y'all, take off your stovepipe hat and monocle and step into the 21st century. Most exchanges are now nothing more than the flow of information from one bank account to another. In our paranoid cypherpunk future, cash, gold, and cowrie shells are only going to be useful because they're anonymous.

Storing value is where it gets tough. Sure, overweening states can debase fiat currencies. And on a good day, Yukon Cornelius can devalue your gold. The problem with every currency is putting trust in some third-party. But in a digital world, there are so many high-value alternatives to cash that you're a dinosaur if you carry bills at all. You should be worrying about backing your wealth, with whatever financial instrument you choose. Digital transfers can convert and exchange that wealth instantaneously. Cash isn't evolving towards gold, and it won't be paper for long. Soon, it will be information, potentially using computers and cryptography to prevent the third-party tampering that's the Achilles' heel of both gold-backed and fiat notes.

The gold standard is backward, and fiat currency isn't a whole lot better. Electronic payment schemes on cell phones, debit cards, and microchips are already catching on across the world as cash dies a slow death -- they just have to be liberated from the stewardship of the state. Should other currencies be allowed to compete? Sure. But I'm skeptical that a new gold standard would emerge in the long run.

Posted by Paultards Go Home | December 21, 2007 2:27 AM

The gold standard is the ONLY MORAL MONETARY SYSTEM!!!!

Inflation is a tax on successful people, and a welfare program for LOOOOOOOTERZ and MOOOOOOOOOOCHRZ who run up irresponsible debt in order to splurge on unnecessary frivolities like food, shelter and medical care!!!

Posted by Aynal Rand-y | December 21, 2007 2:27 AM

Gold has also been shown to mitigate the effects of osteoarthritis.

Just sayin'.

Posted by Kyle | December 21, 2007 8:40 AM

Rahul wrote: That being said, I know the system is a fraud, and I admire Ron Paul for calling it out.

Thank-you for that unintentional, but vividly transparent, statement of exactly what your problem is.

Posted by anony-mouse | December 21, 2007 12:14 PM

The "cross of gold" people were in favor of the "free coinage of silver" leading to "bimetallism."

For my part, I'm in favor of a niobium standard. But then there'd be people arguing about "niobium" vs. "columbium"......

Maybe a borax standard. Everyone to Death Valley!

Posted by JohnAnnArbor | December 21, 2007 12:59 PM

OK everyone - homework for tomorrow: Go find out the connection between the Bank of England and the gold standard in the 1920s and 30s.

Posted by ZZMike | December 21, 2007 1:48 PM

Megan,

You're going to have to work a little harder before I throw my Rothbard, von Mises, Hayek, Menger and Hazlitt in the trash.

Posted by Matt | December 21, 2007 3:35 PM

Megan-

Seignorage, aka the "inflation tax" is not an important source of revenue for the federal government.

Why, then, is the "AMT" such an issue?

It is the "inflation tax" that is turning a 1970's tax on the rich into a middle-class 'flat-tax'... seems almost "progressive" to me.

Posted by Billy Bats | December 21, 2007 11:44 PM

I'm no expert, but it seems to me that a gold standard would limit, or expand the money supply according to the level of extraction of a metal from the ground. This seems a dubious way to determine what the supply of money should be. Additionally, I notice that people are simultaneously complaining that the column is silly and a waste of time, while spending a lot of time writing in. What's up with that?

Posted by Bill | December 22, 2007 7:08 AM

"But in the comments here (and to hear Megan tell it) we see many who would dismiss the gold standard not for its deflationary aspects, or the hard economic shocks it engenders, but because it would have no effect. Bizarre!"

Not entirely bizarre.

When the gold standard lost out to other market-based alternatives in the 1920s-1940s, there was (relative to today) not that much of the stuff.

The problem is, since 1960, the cumulative global supply of gold has doubled. Since 1900, it's quintupled. And that means, yes, if we were on a gold standard, we'd've seen 100% inflation since 1960, and 500% since 1900.

(Sources:
http://www.goldsheetlinks.com/production2.htm
http://minerals.usgs.gov/minerals/pubs/commodity/gold/
http://www.gold-eagle.com/editorials_05/zurbuchen011506.html

...and maybe it's because I've read too much Gibbon, and other historians of classical times, but that's before we get into debasing of the currency, and speculative pressures, which gave us the Panics/Depressions of 1837 and 1893.

The public debt grew from 75 million in 1791 to 2.91 billion in 1913, when the Fed was established. That's almost 3800% growth, all the while under a gold standard. (Source: http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm)

That's the problem the gold advocates want to put their thumbs in their ears and go, "LA-LA-LA" about. By their own arguments -- whether it provides a hedge against inflation, whether it is attractive in the free marketplace, whether it constrains government growth -- the gold standard is a loser.

To use a hideously unfair James Carville paraphrase, "It's the hypocrisy, stupid."

Posted by Laszlo Toth, Jr | December 22, 2007 9:29 AM

Just a few short weeks ago you doubted the existence of the gold bug libertarian.

lol

Posted by mickslam | December 22, 2007 10:36 AM