Why is the gold standard crazy?

I wrote a long post on this a couple of months ago. Here's the highlight reel:

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.

No Ron Paul supporter (or other gold standard advocate) has managed to articulate to me what problem the gold standard solves. Inflation is low, and even better, relatively predictable, so the expectation is built into asset prices. Moreover, most people on fixed incomes are retirees, and most retirees get almost half their income from Social Security, which is indexed for inflation.

This Ron Paul speech lists a number of reasons, all of them wrong:

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

3. American exporters are whipsawed by our fluctuating currency. Unless Dr. Paul has plans to put the entire world back on the gold standard--which I mote would require the kind of powerful international organization he's so suspicious of, or invasion--our currency will still fluctuate relative to others if we're on the gold standard. Every time the price of gold changes in another country, American exporters will either be helped or hurt by a change in the relative prices of their goods. The gold standard will shelter exporters from currency fluctuations only in their trade with other countries on the gold standard. There are no other countries on the gold standard.

4. Fiat money inflation benefits those shadowy figures who receive access to artificially inflated money before the inflationary effects kick in. Those shadowy figures being the bankers who loaned it to you so that you could buy your house. At any rate, this would only be true if we were talking about unexpected inflation. Expected inflation is already built into asset prices. The US economy does not have significant unexpected inflation.

5. Fiat money inflation "also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state". This is an extraordinarily primitive view of the money supply. The Federal government is not Caesar cutting his denarii with lead. The revenues from seignorage on 2% inflation are trivial. The Federal government gets the money for the "welfare-warfare" state just where it says it does: by taxing the bejeesus out of your wages.

6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.

7. Congress "should only permit currency backed by stable commodities such as silver and gold". Commodities, almost by definition, are not stable. The price of gold looks as if it used to be stable, because the dollar was fixed relative to an ounce of gold. This does not mean that its value relative to other economic goods was unchanged. You could fix your currency to the price of a bushel of wheat, and suddenly "wheat bugs" would be claiming that wheat is the only reliable, stable commodity in the world whose price never changes. That wouldn't stop fluctuating wheat supplies from whipsawing your economy back and forth. To be sure, the supply of gold changes more slowly than the supply of wheat. But demand for it is not so fixed.

Comments

Megan,

A return to a gold backed currency is certainly not "crazy" and is probably a good idea. Many countries, including Switzerland, have their commodities backed at least partially by gold or silver.

Here's a CNBC panel of economists, including Don Luskin and Steve Forbes discussing Ron Paul's plan to return to gold-backed currency. They are *strongly* in favor of it:

http://www.youtube.com/watch?v=Cilwld5fj48

Posted by Matt Abar | December 19, 2007 6:54 PM

So what about Paul's assertion that interest rates are artifically low?

To me, that's a problem for two reasons: First, low interest rates cause people to be irrational in their investments, because cash is so readily available. See, e.g. the housing bubble (people taking out huge mortgages, because payments were so low).

Artifically low interest rates also, in my opinion, cause irrational investing because, after all, how else are you going to make a return on your investment? You sure as hell won't make any return putting your money into bonds, or savings accounts. So you pump more money into risky stuff that appears to give a good return. You thus bid up the stock price on these risky investments, thus creating the illusion of value, causing other people to pump money into these risky investments, and creating -- surprise! -- a bubble.

Posted by Phil | December 19, 2007 6:58 PM

Its not so much Fiat currency VS. Gold/silver as much as public money vs private credit extended by the federal reserve banks.

This private credit is directly responsible for our federal debt and the requirement for a national incometax (used to pay interest on the debt).

Remove the Fed, remove the debt.

I believe Ron Paul understands this.

Posted by Isaiah | December 19, 2007 7:13 PM

Megan,

Here's the reasons 1 by 1:

1) The Federal reserve is the main reason for the Great Depression. They virtually fix prices (interest rates are prices of risk), thus creating mispriced risk, the main reason of the recent housing bubble. The Fed was created through lobbying by large banks, because they wanted a bail-out mechanism when they screw up.

2) Inflation is a lot higher than the Core CPI. The Core CPI measures prices, not money supply. Prices are subject to many factors besides inflationary causes, such as technological changes, currency exchange rates, economic growth, etc... Furthermore, the Core CPI excludes food and energy prices, a huge portion of the spending budget for most Americans. In reality, inflation is much much higher than the Core CPI, the base for adjustment in cost of living expenses in Social Security and other programs.

3) The price of gold is relatively stable. The fluctuations in the price of gold are not because of supply/demand of gold, but mostly because of inflation and currency exchange rates. Pegging a currency to gold will keep it relatively stable. Furthermore, Dr. Paul isn't advocating gold per-se, but the idea of a hard-asset backing a currency. Realistically, it can be any asset with a stable supply/demand.

4) I understand your point of unexpected vs expected inflation, but inflation is severely understated to the public to begin with, as I explained earlier.

5) The Fed is actually pretty secretive in their actions, but a significant amount of money is actually printed by the Treasury Dept at the request of the Fed every year and pumped into the money supply. To say "well it's not a very big amount" is a cop-out of the argument. The government is not allowed to print money out of thin air at all!

6) It has nothing to do with Congressmen running printing presses, it has to do with the government handing over its power to a privately-owned bank. The Federal Reserve is owned by private means, not by the government.

7) Most people who know about gold would agree that most of the gold in this world has already been discovered (no new supply) and that the demand for gold is rather stable (jewelery, that's about it). Therefore, gold is an asset with a stable supply/demand, thus making the implied value stable and not fluctuating.

Now, here's the main reason Ron Paul is in favor of the Gold Standard, which you have failed to mention: The Gold Standard serves as a checks-and-balances measure between the people and the federal government, allowing the people to keep their government in check and honest about the money supply in the economy. Without this standard, there is no way to know for sure if the government is printing money or not, and one is left to trust the politician, an oxymoron in itself.

Posted by Steve | December 19, 2007 7:19 PM

We were on a gold standard when we had the Great Depression. That would seem to argue against its supposed beneficial attributes.

Posted by Patrick R. Sullivan | December 19, 2007 7:20 PM

Greenspan is an old fan of the gold standard and even admitted the other day that the goal of the fed is to approximate a gold standard as best it can.

We have only had a fiat system for a few decades. Were we really "crazy" throughout the majority of our history?

Ron Paul admits that there are shortcomings to the gold standard and does not call for a complete return.

Personally, I like the Friedman model of an automatic money supply adjustment--getting the bankers and the politicians completely out of the equation. But in any event, it is a worthy debate and should not be shouted down with hyperbole ("crazy talk!") or sophomoric certainty (your essay).

Posted by Aaron | December 19, 2007 7:25 PM

I believe the real stance of Paul's is to allow competing currencies that could in fact be commodity-backed--not an entire wholesale switch back to the gold standard for greenbacks.

Posted by Jackson Maxim | December 19, 2007 7:27 PM

The simple case for the Gold Standard is as follows:
-Gold is God's money, he created it and all can access it freely. And he is not making any more.
-Currently there is a dividing line. On one side, "us" people must work for money. On the other side a government created Elite Banking Cartel (the Fed) has a monopoly on the creation of money out of "THIN AIR" that they then loan to the rest of us and collect the fruits of our labors through interest (and inflation). The immorality of this system is absolute. There are slaves and masters.
-The penalty for inflation (debasement of the currency) contained in the Currency Act of 1792 was DEATH. Now inflation is considered normal. I say death to the FED, and Ron Paul is just the man to do it!!!!!!!!!

A lifelong Democrat turned Ron Paul Republican.

Posted by jIMMY THE GR | December 19, 2007 7:27 PM

"Inflation is low, and even better, relatively predictable, so the expectation is built into asset prices. Moreover, most people on fixed incomes are retirees, and most retirees get almost half their income from Social Security, which is indexed for inflation."

What??? Megan, are you serious?

I suggest you learn how inflation is calculated. You can start by understanding "Hedonic Adjustments" (just google the term). If you’re still convinced that inflation is low and predictable, please explain why the Fed’s balance sheet continues to grow? Inflation is nothing more than a transfer of value (it's stealing wealth). I don’t think you understand this. You should read what Alan Greenspan wrote on gold in Ayn Rand's book – here a the link:
http://www.usagold.com/gildedopinion/greenspan.html

Posted by PF | December 19, 2007 7:28 PM

Wow, this is a very ignorant post.

1) Alan Greenspan agrees with Ron Paul, during the later parts of the 19th century we had the best economic stability.

2) So, people don't save money because of the Wii? Ya...

3) The gold standard would produce a stronger currency and countries like Iran wouldn't have to drop the US Dollar because of devaluation.

4) Those who spend the money first, those people at Wall Street, get to spend it before the currency circulates and devalues itself. It eats away the middle class and makes more billionaires.

5) Yes, they tax us. They also borrow money from China and Saudi Arabia. Once they run out, they look for more money by looking towards the fed to print more. Just look at those who want to "liquidate" the housing bubble.

6) Congress has the power, under the constitution, "To regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;" - this hasn't even been amended. you know, we /did/ have a currency before the Federal Reserve, right? The US also has a treasurer, yes?

7) ...Gold is the same worth as it has always been, generally speaking. It's the dollar that has either gained or lost value that makes the Gold prices different. Over 1000s of years, Gold and Silver have proven themselves the most valuable of commodities.

Is this a satire site?

Posted by Brent | December 19, 2007 7:32 PM

Patrick,

Top hats were also popular then. That would seem to argue against the use of top hats.

Top hats were also worn by members of the Fed who choked the money supply, creating the Great Depression.

Posted by Aaron | December 19, 2007 7:32 PM

Megan,

Even though your post is largely incorrect, in my view, I will give you credit for actually *reading* and attempting to *engage with* Ron Paul's arguments, which puts you ahead of 99% of the establishment media, which simply paints innacurate caricatures without even attempting to understand them

However, it is interesting that you maintain conspicuously silent on issues such as the dangers of politicized control of the money supply by the Fed (such as we are seeing now in housing) or the famous Greenspan put-- the existence of these phenomena is hardly controversial to economists or those on wall street. Your treatment of inflation is also ridiculously simplistic as huge numbers of mainstream economists will tell you these numbers are inflated. It are these sorts of abuses that are at the heart of Paul's critique of the Fed. If Paul is so wrong on economics, why were the Bond Traders cheering him on (as you can watch on youtube) when he went after Bernanke. Perhaps the people whose livelihoods depending on understanding these issues know something that you don't.

Posted by Jeremy | December 19, 2007 7:32 PM

Uhh, recessions were much, much shorter before the Fed.

Posted by Noah Yetter | December 19, 2007 7:32 PM

Oh, Paul does NOT WANT to back the US Dollar with gold, he wants to enable gold-backed currency to compete though. What's the big deal with that?

Posted by Brent | December 19, 2007 7:32 PM

I am not anyhere near retirement, but had an economics professor that was in favor of a gold backed currency. That was back when we had stagflation in the late 1970's, and early 80's - a problem caused by the fed, and only fixed by raising interest rates to near 20%.

One further point has to do with social equity. When the Fed acts to prop up markets, or to create a bubble, or to prop up poor loans, they are helping a small group of people at the expense of the rest of the people. Its true that there was economic instability with a gold standard. Of course, one of the results was that people had greater upward (and downward) mobility. I see this type of instability as a good thing, the economic justice of a free market.

At the very least, you should admit that we need a more transparent Fed with more congressional oversite.

Posted by John Brown | December 19, 2007 7:33 PM

Allow me to explain:

Your "wealth" can be thought of in terms of goods and services. The more goods you own and services you can access, the "wealthier" you are from an economic point of view. Furthermore, the total wealth of the world is the sum of all the individual wealths of the people in the world, correct?

Ok, now let's say you take a dollar out of your pocket and burn it. Is the world more or less wealthy?

The answer is, neither. The total amount of wealth in the world hasn't changed, all that's changed is your claim on wealth (money) has decreased, and everyone else's claim on wealth has thus increased through deflation.

When you create/destroy currency, you cannot create/destroy wealth. All you do is redistribute wealth. This is what the government does when they print money. They don't affect the level of wealth in this country, they only take the wealth from the people and give it to the government and its creditors. That's why printing money is immoral and makes no sense.

Posted by Sean | December 19, 2007 7:35 PM

It appears that you find some kind of false value in currency that is politicized. Fiat currencies ALWAYS fail along with the governments that create them. And when that failure occurs, the holders of that government's fiat currency are left with nothing. This makes saving foolish....fiat currency must be spent to avoid risk.

You offered Argentina as an example. Some others include Iraqi dinars, German Rentenmarks from the Weimar Republic, Brazilian cruzados, and any number of other failed fiat currencies. Anyone one of these examples should illustrate the danger in relying on a government to manage currency.

Holding a fiat currency, one places an inappropriate amount of trust in others to preserve its value. Doing so is like handing the keys to your car over to a complete stranger. Will you get your keys back when requested? Will the person take your car for a spin around the block or across country? Or will they have it chopped and sell it for parts?

Fiat currencies inflate as government debt increases. Without very strict limits on government spending and debt, one has little control over the demands of others in respect to what might be expect from government. US is increasing at an alarming rate along with an incredible amount of unfunded future liabilities. To think this can continue without destroying the currency is insane.

Gold, silver, and other precious items used as portable wealth cannot be politicized and will always have some intrinsic value. They can remain in your safe keeping without losing that value.

Posted by Paul | December 19, 2007 7:50 PM

If you believe in Free Markets then you are for the gold standard, if you want managed markets then you want the Fed to dictate the value of your currency.

Remember the idea of a central bank controlling the money supply is straight out of the Communist Manifesto.

Posted by Michael Cathcart | December 19, 2007 7:53 PM

Thanks for writing this! I had been wondering why you were so scathing about the gold standard compared to the usual political planks of protectionism and boondoggles and nationalizing capital investments by retroactive taxation and so on.

I think you are putting some of your case more strongly than it deserves. In particular, point #2 doesn't seem "daft" to me. I agree inflation is probably not a dominant reason for low savings, but it still seems like a significant reason (even setting aside the effect of inflation on the tax bite on interest and capital gains). And I also think your various statements like "inflation is low, and even better, relatively predictable" seem at least debatably optimistic. Perhaps you mean "compared to the Third World excesses that people associate with fiat currency," but if so, in this context that would mean you're writing unclearly. If you mean "compared to the uncertainties of a gold standard," well... As I understand it, trade in 100-year bonds is depressed these days compared to under the gold standard. Is it only that bond investors are under the bad influence of Vernor Vinge? I think the influence of FDR might have more to do with it.

It is too bad about various of Paul's other arguments, though, especially the nativist vaguely conspiratorial stuff. I'm generally receptive to policy changes reducing government discretionary economic power, including alternatives to government-controlled currency, so I tend to be receptive to the policy conclusion of getting rid of the Fed...but it doesn't sound as though Paul has followed a very sound chain of reasoning to arrive at his conclusion.

Posted by William Newman | December 19, 2007 7:56 PM

No one much under the age of fifty at this point remembers high inflation--remembers, in the sense of actually having cared about it. I was 7 when Volcker finally Whipped Inflation Now. I doubt even high school students generated much emotional interest in the subject.

What inflation we do have is priced into interest rates. There's pretty solid evidence that people are fairly rational when it comes to this sort of thing; they price in a little inflation when looking at the expected return, and so the banks/insurance companies/etc. offer them higher interest rates to compensate. It's only unpredictible inflation that damages savings. Moreover, most capital saving is invested in inflation-neutral instruments: houses and stocks.

Posted by Megan McArdle | December 19, 2007 8:08 PM

Megan,

As one of the previous posters mentioned, I commend your effort to get to the bottom of the issue, which is MUCH more than anyone else tries to do when covering this topic.

It is not about the benefits of gold but rather the problems with the Fed. Once you realize that the federal reserve system was created by the nations largest privately owned financial institutions in the early 1900s and you know how it works, you will see that it strongly favors the large banks at the expense of the average person.

Inflation is not low. It is much higher than stated and even using the feds data on prices you can see that once the fed was created inflation has skyrocketed. wiki the federal reserve to get a general picture.

Another reason why Ron Paul correctly argues to remove the central bank and promote a hard currency is that it keeps spending in check. We would not go to war unless it was absolutely necessary and we certainly would not be able to have 200 bases overseas. The federal reserve allows for excessive spending and growth of government through inflation and borrowing. This growth of the government is the reason why we have $9 trillion in actual debt and well over $45 trillion in unfunded liabilities. These numbers are growing very fast and if we do not change the system to rein in spending the Great Depression will look like a cakewalk.

Posted by Gtalker1977 | December 19, 2007 8:18 PM

Excellent article.

I'm so glad someone has finally said it even though reason and logic matters not to the "sound money" crowd.

They don't want fiscal responsibility. They want a new world order, nothing more than a right-wing version of populist Hugo Chavez rhetoric.

Posted by The Piker | December 19, 2007 8:26 PM

It's OK, guys. Megan knows more about economics than Steve Forbes and a whole host of other well respected economists. The proof? She has a blog. Don't you folks realize that? She has a BLOG.

Posted by TJ | December 19, 2007 8:26 PM

Megan, you really ought to point out that our last bout of severely high inflation was brought on by the price of a commodity (oil) being raised by the cartel (OPEC) which mostly controlled supply. The same could be done with any other commodity -- unless you want to limit your currencies to only those commodities which are produced overwhelmingly within the United States.

Having lived thru the last time, I have no desire to see commodities as the basis for our currency. The current system has its flaws. And, when mis-handled, can cause problems. But the alternatives proposed so far are all demonstrably worse.

Posted by wj | December 19, 2007 8:30 PM

Megan,

Your critique will make more sense, if you spend some time studing austrian school of economics, rather than some peripheral observation of Paul's comments on monetary policy. Even Alan Greenspan as recently as a month or two ago publicly supported a gold standard.

http://www.youtube.com/watch?v=kEZnPtbi77g

You would also watch how Austrian School has debunked most of the criticism of gold standard.

http://mises.org/MultiMedia/video/Salerno/Salerno10.wmv

Prices fell for more than 130 years after the creation of the united states. The U.S went through industrial revolution during the same period. A period of fastest economic growth was soon after the end of civil war almost all the way to creation of the fed. There were a couple of recessions in between.

Recessions are not a fault of the Gold standard per se. It is caused by fractional reserve lending ( a ponzi scheme ) which is destined to fail. Recessions at times where deep but they were always short. There was no depression during the gold standard years. The only depression happened under the watch of the Federal Reserve.

Posted by Oil Shock | December 19, 2007 8:38 PM

TJ: I too was amazed to read that her primary credential for diving into economics is that she's run a blog for four years on economics, business and cooking.

I know what passes for economic education in most universities. (I have a B.A. in Economics.) I also know what passes for the economic component of most MBA classes.

The sad truth is that economics as a discipline is highly politicized. At the time I was wishing to pursue a Ph.D in the subject, my interest in cognitive-science micro theory was seen as something way out there. I couldn't get any support. Now, Behavioral Economics is the hottest new sub-field. I'm glad to see that development as it might speak to some hope that the economic academy will become a bit more humble and open to debate on topics versus preventing true engagement of the ideas of the non-dominant schools.

I'm continuously surprised by how much gets regurgitated in our public discourse from what amounts to not much more than an Econ 101-102 level of knowledge. Economics, sadly, is taught primarily as a technician's discipline. People know how to manipulate a handful of graphs and equations, but can't actually speak to the deeper questions. And the same truisms get repeated over and over. If I have to hear one more time that the gold standard is the cause of the Depression from someone whose own endeavor into the question consists of having read some Newsweek article, I'll have no more hair.

Economics is not a hard science. And that's the problem. We try to pretend that the discipline is capable of the same level of rigor and confidence in its results of what is the cause and effect of various things as we might have with say physics or even in medicine. But we don't have that luxury and it is time we stop pretending.

Your answer to #6, while entertainingly snarky, demonstrates you do not know what you are engaging in or you don't take constitutional argument with any seriousness. You'd be at home in most law school faculties. Of course, that doesn't make them right.

Posted by JACK | December 19, 2007 8:49 PM

I don't even like gold (I suppose Paul's position because he wants to legalize private currencies), but I do feel compelled to respond:

1. The bimetallic standard was terrible, no one would question that. However, the success of a single, floating currency when compared to the bimetallic standard is no reason not to improve upon our current system. Also, America did experience its most rapid growth even with all that instability (though I don't mean to suggest this implies causation).

I should also point out that, according to many Austrians, many of the booms and busts of the 19th century were caused by inflationary policies, and not the gold standard.

2. Cheap credit is a direct replacement for savings. If you can get a cheap loan, why bother saving? If you can't get credit cheap enough, you must save.

3. I'm not entirely sure what Paul meant here, so I can't comment.

4. The housing bubble wasn't significant? According to the Austrians, it was a textbook example of the Mises-Hayek business cycle. I suppose if you accept a single "price level" for the entire economy, then no, we probably don't have significant inflation. But the entire point of the Austrian critique is that newly-created money does not enter the economy uniformly.

5. When the government overspends, it sells debt as T-bills. The Fed sets interest rate targets and buys T-bills using freshly-printed dollars until those targets are reached. What am I missing?

6. Obviously, congress has the power to do everything necissary and proper to "coin money and regulate the value of the currency". Obviously, the US Mint is both necissary and proper, but it doesn't follow that the ability to set interest rates is.

As I'm sure we all know, the power to emit bills of credit was purposefully omitted. We can argue over whether or not its advisable for a government to print paper money, but lets not pretend its legal for this one to do so. Sadly, the ability of congress to regulate the value of the currency makes the medium (specie or paper) used rather insignificant in my opinion, although I believe the definition of the word "regulate" has changed significantly from its original meaning in the Constitution.

7. The dollar isn't stable because the government makes it, its stable because its used as a medium of exchange. Similarly, if gold was used as a medium of exchange, its value relative to consumer prices would be more stable than it is now. The value of capital goods relative to one another will always fluctuate, just as they do relative to fiat currencies.

And finally, I have a question:
Most economists accept that prices coordinate action within economies by conveying necissary information. They also accept that the rate of interest is the price of borrowing money. However, most economists do not accept Hayek's arguments that altering the rate of interest produces similarly bad effects as altering other prices (over-investment, in this case). How can they accept that prices convey information necissary to coordinate actions without accepting that the rate of interest does the same? What do they feel is the effect of altering the rate of interest?

Posted by G | December 19, 2007 8:56 PM

"Here's a CNBC panel of economists, including Don Luskin and Steve Forbes discussing Ron Paul's plan to return to gold-backed currency. They are *strongly* in favor of it:"
>>>>
Neither Don Luskin nor Steve Forbes are economists.

Posted by Dean Moriarty | December 19, 2007 9:31 PM

This "vector calculus" you speak of sounds like a lot of mumbo jumbo. Let me offer you some pamphlets that will introduce you to a fascinating new science called "arithmetic."

Posted by Julian Sanchez | December 19, 2007 10:22 PM

I'm sorry for this totally non-value adding comment but Megan pwned Ron Paul.

Posted by JamesFromPittsburgh | December 19, 2007 10:27 PM

I find it amusing that any post critical of Ron Paul on any site is suddenly flooded with comments from unfamiliar names that spew pre-canned propaganda without even a hint of addressing the article (at least a few mentioned Megan by name).

Maybe I'm wrong and Megan's audience has a large contingent of Ron Paul fans but I'll always be suspicious as I've seen this everywhere. He ain't THAT popular people. He'll be lucky to clear 10% of the vote in the primaries.

Posted by Chas | December 19, 2007 10:42 PM

To the author

Would you say Gas for your car is too much today?

Got a clue yet as to where I am going with this?

Gas is really not much different in price then it was in the 1960's.

It only followed inflation which is really the dollar shrinking.

Yet people are upset about the high price of gas.
Why would they be upset about this if it really hasn't changed in value?

Because all things don't follow inflation!!
Wages do not follow inflation for all workers.

In the 1960's no one really complained about the Price of home oil or the price of gas.

Could it be that Black gold and Gold are tied to each other in value?

How much was gold in the 1960's?
What was the min wage back then?

Do you get the point yet or shall I give you 10,000 more examples.
It's easy to do since we have 50 years of history to go by and looking up common stuff in news papers isn't all that hard.
Subway token NYC 15 cents
Slice of Pizza and a Cola 25 cents
Gallon of Gas what was it back then - about 35 cents
Seems like almost everything is more than 10 times higher in price
Wait - workers are not getting more than 10 times higher pay - why is that?????

Posted by Vincent G | December 19, 2007 10:48 PM

OHHH! Look above ^^^^. "to the author" huh. This guy couldn't even bother to type your name in. I rest my case.

Posted by chas | December 19, 2007 10:53 PM

Is anyone doing reverse DNS on the IPs these λιβερταριανς posted from? I bet the distribution would prove interesting...

Posted by ...Max... | December 19, 2007 11:00 PM

Thanks for the summary, Megan. Nicely put.

Posted by Dan | December 19, 2007 11:39 PM

"1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank."

"before America had a central bank."

MM, which time are you referring to?

Posted by Mark E Hoffer | December 19, 2007 11:46 PM

QUOTE: 6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.

With this one, you reveal yourself as either disingenuous or dumb. Constitutionalists clearly do not mean that legislators should man the presses themselves when they say that the responsibility for the money supply should remain under the direct control of Congress.

Posted by Paul Stone | December 20, 2007 12:20 AM

Now, I support Paul, but the idea of the money supply being in direct control of congress scares me. It really, really scares me. I think it is very necissary and quite proper for congress to offload responsibilities it is too immature to handle itself. I don't doubt that the Fed isn't the best way for America to handle money, but I think its far preferable to the government having direct control over the nation's currency.

Since Paul doesn't actually advocate getting rid of the Fed (but simply ridding it of its legislated monopoly), I'm not worried.

Posted by G | December 20, 2007 1:23 AM

Megan-

No one much under the age of fifty at this point remembers high inflation--remembers, in the sense of actually having cared about it. I was 7 when Volcker finally Whipped Inflation Now.

I just turned 43 in October- and I actually remember "WIN" buttons!

I'm sure I didn't "care" about 'inflation' as an 'abstract idea'... but, I was smart enough to know why Mom 'got a job' in 1974- despite having three children under age 12.

BTW, I was 18 in 1982- when 30 yr Treasury bonds were paying 14%.

Posted by fletch | December 20, 2007 2:23 AM

Your understanding of central banking is no good.

If you want the standard of living you are used to to exist, and you to be paid in real money, vote for Ron Paul.

If you do not, well, the 1900's are filled with examples on what a faltering currency and war does to countries.

We dont need a gold standard for all money, but we could certainly use silver certificates or other hard currencies for us to buy to get us out of this fake crap they pay us in now.

Posted by Mick Russom | December 20, 2007 3:02 AM

I'm less convinced than I used to be about the utility of the gold standard, but I think you leave off the most obvious point: its honesty. Does the government manipulate the currency? Not really, but it could. With gold, an ounce is an ounce, no matter what Congress may say.

For now, inflation is low and the economy is growing, so we can say that the fiat money system works. But people always say the system works in good times. Just because it hasn't failed recently doesn't mean it won't.

That said, this is perhaps the 100th or 150th most pressing issue facing the nation, so I can't get too worked up about it.

Posted by Kyle | December 20, 2007 8:48 AM

Jack,

"Economics is not a hard science. And that's the problem. We try to pretend that the discipline is capable of the same level of rigor and confidence in its results of what is the cause and effect of various things as we might have with say physics..."

You are so right!! I soon learned while earning my BA in Economics that the discipline suffers from a severe case of "physics envy."

It should be more akin to biology...a science of observation. You should check out Veblen and the Institutionalists.

The conclusions I have drawn are 1) have the government do as little as possible relative to the economy and 2) make sure cartels and politicians have nothing to do with the money supply. There is no doubt in my mind (nor Bernake or Greenspans for that matter) that the FED caused the Depression.

If not gold, we need something help besides human manipulation through cartel regulating our money supply.

Posted by aaron | December 20, 2007 9:38 AM

Gold is God's money, he created it and all can access it freely. And he is not making any more.

That's silly. If that's so, let's outlaw trading in gold and let God set his own price for it.

The same can, for practical purposes, be said for diamonds. I mean natural diamonds ARE being made, but no one is waiting around for them.
Anyone want to go on a diamond standard?

And of course all gold is not yet found. It seems to me that using any traded commodity as a backstop presents the same problems. Let's face it, the current PRACTICAL currency backstop is another commodity: OIL.
Everyone who thinks a barrel of oil costs $90 to produce and deliver raise hands. The REAL value is around $25-$30, if I'm not mistaken.

I have a serious question.. when gold and silver were used as currency, what was their actual practical value?
Please name a product that, of necessity, included gold or silver. And no, jewelry and coinage DOESNT COUNT!
I can only think of medical instruments, or containers which needed anticorrosion/antibacterial properties.

The use of those precious metals as actual currency declined at one and the same time as they became necessary in industrial products... in essence, electronics.

Which brings us back to diamonds, considering that world goods production wouldnt suffer a damn bit if all natural diamonds suddenly disappeared in a puff of smoke, we could simply fill the void where they were used in production with different processes or replacements that we have manufactured.
Considering DeBeers, Russia and the difficulty in establishing value, no one in their right mind wants to use diamonds as currency.

Yet we are, in effect, using oil as the standard, and letting trading cartels set the price.

Oil is tied to every indicator of productivity and we shun management of it; while, like Russia with its diamonds, we sit on vast reserves.

Or do we shun management of oil?

I sincerely doubt that we would be talking about the currency's financial distress if oil was trading at its true cost: $35. Which is a propitious number. Because, for the longest time, at the end of the Gold Standard, the set value per oz was.... $35.

But it was a false value. In other countries gold was on the commodities market and the price fluctuated accordingly; which made it REALLY difficult to have a real monetary policy when your currency was based on something with only a virtual value on the one hand but was affected by industrial needs {electronics}on the other.

We have the same problem today. The price of oil is a virtual value. We can produce and deliver it at a cost of $35.
Sure, we ARE managing oil.. only in the wrong direction. The inflated price of oil is being addressed by the proponents of 'manmade global warming' theory.
The remedy there is, of course, to make the backstop commodity obsolete, thus reduce price, in favor of increasing "Human Productivity per bbl Used". Sounds sort of similar to the argument for replacing gold as the standard, doesnt it?

This is a strategy, though, that depends on the demonization of the commodity, sort of like saying "Gold is the instrument of the devil" or gold promotes a deadly disease.
In oil's case, that relies on the literal temperature of the globe and tying carbon to it. If we enter another tangible ice age or cooling, all is lost, and oil is still going to be artificially overpriced.

If we simply opened up all our oil ranges and started producing and setting the price at 'cost plus' in the free market, the price of oil would plummet back down to true value.
And VOILA!!! Suddenly the dollar would regain its 'health' and no one is going to be quibbling much about how much of the currency is held in foreign hands.

Sure there would ALWAYS be a hedge built into the value based on perceived future scarcity, but it would be more wisely addressed at maybe ten percent. And, just as in falling sky predictions of 90 years ago, that 'peak point' just keeps getting pushed out.

It wouldnt kill TRUE development of alternatives, either. There are technologies which can address replacing $35 oil. Of course grain ethanol isnt one of them. And it just might not be profitable to slash/burn eco-forest to grow ethanol beets, either.

Posted by pettyfog | December 20, 2007 9:40 AM

1. You need to examine the 19th Century more closely. First, the gold standard had a one-time problem because gold discoveries in California and Alaska led to inflation. There was massive inflation in Spain after the plundering and mining of gold from the New World. No one believes there is a gold deposit large enough and cheap enough to distort the market today.

The 19th Century also had free banking, sometimes called Wildcat Banking. Many of the crises in the 19th Century were linked to bank failures, not the gold standard, and are eerily similar to the current credit crisis caused by bad mortgages.

2. Americans aren't afraid inflation will erode their savings, they're rational. My local savings bank is paying about 1%. I go online to get 4%, but many older people are probably stuck with 1% or getting 4-5% in CDs. A few years ago, rates were even lower, and banks were selling mortgages at 5%. People did the rational thing when faced with cheap money—they borrowed more. The savings rate can decline for two reasons: people spend more, or people borrow more than they save. Americans are saving, but they are borrowing to spend more because the money is too cheap.

3. Several countries already peg to the dollar, including China, Gulf States, and Latin American countries. So if we went on the gold standard, much of the world would be on the gold standard. Knowing exchange rates 10 years from now is very beneficial for global trade.

4. When money is inflating, it's best to be at the beginning of the process, not the end. If the government gave me a printing press, I'd bet you wouldn't argue that I didn't benefit from inflation.

5. The Fed conducts monetary policy by buying Treasuries. Thus, if there was no deficit, there could be no Federal Reserve bank. Think about that.

6. I don't really disagree with you per se.

7. Gold is pretty steady now, for reasons I cited, but there are ways of dealing with the drawbacks. If we're on a gold standard, speculators could try to distort the gold market, but I think the central bank could deal with it. No system is perfect, the question is what are the relative merits of each system.

Posted by 8 | December 20, 2007 9:47 AM

Jack,

"Economics is not a hard science. And that's the problem. We try to pretend that the discipline is capable of the same level of rigor and confidence in its results of what is the cause and effect of various things as we might have with say physics..."

You are so right!! I soon learned while earning my BA in Economics that the discipline suffers from a severe case of "physics envy."

It should be more akin to biology...a science of observation. You should check out Veblen and the Institutionalists.

The conclusions I have drawn are 1) have the government do as little as possible relative to the economy and 2) make sure cartels and politicians have nothing to do with the money supply. There is no doubt in my mind (nor Bernake or Greenspans for that matter) that the FED caused the Depression.

If not gold, we need something help besides human manipulation through cartel regulating our money supply.

Posted by aaron | December 20, 2007 11:23 AM

I say bring on Ron Paul and the gold standard. In the unlikely event of his getting the GOP nomination, the Democratic candidate can give an updated version of William Jennings Bryan's Cross of Gold speech. That speech is regarded as one of the great American political, but until some fool tried to bring back the gold standard, it’s useless.

Can’t you just see Barak Obama?

“You shall not crucify mankind upon a cross of gold!”

Posted by TheCraig | December 20, 2007 1:52 PM

My personal response is in the next paragraph. First, I have a question: Why would anyone who calls themselves a Libertarian want the government involved in the currency at all? It seems to me that the only legitimate Libertarian policy with regard to money is the one in which all money is private. Why NOT let money compete in the free market without government interference like any other good?

I have several reasons why I am for private money and a hard currency standard: anything else can be easily manipulated by the whims of bureaucrats; fiat money allows the government to easily increase in size and scope by printing money at will; and frankly, as a Christian, I believe that fiat money whose value can be arbitrarily manipulated constitutes dishonesty. The Bible teaches that we should have one set of weights and measures. That sounds archaic until you realize that it just means the grocer (for instance) shouldn't have one scale that he uses as a seller, and another scale that he uses when he is the buyer of goods. Money whose value is consciously manipulated by government for the benefit of either borrowers or lenders, importers or exporters, rich or poor, is simply wrong.

Posted by Toby Wilson | December 20, 2007 2:18 PM

I just found your site, and, as a fellow Chicago MBA, I'm a bit dismayed by your economic analysis. I strongly encourage you to spend some time researching the Austrian school of economics, the history of our dollar, and the history of all fiat currencies.

Posted by Ken Bell | December 20, 2007 2:36 PM

1. Firstly, the deepest recession of all- the Great Depression- was a result of what was essentially fiat currency. Sure, gold was at that point redeemable in Federal Reserve notes, but there was not a "gold standard" that regulated the supply of money. Yes, the amount of credit they could issue to financial institutions was regulated by requirements that a certain proportion had to be backed by gold, but the Fed had complete control over the supply of money.

The fact is that the Federal Reserve jacked up the money supply big time during the 1920s, partially to help the British return to their pre-war price. This caused a wave of easy credit to hit, which led to all of the delights of a discretionary expansionary monetary policy (overconsumption, way too much debt, malinvestment, etc.) that build bubbles that collapse and cause serious damage. And boy, did the Fed create quite a bubble that burst, and did it ever do some serious damage!

Yes: there has been more "stability" in terms of GDP figures since the Fed was put into place. But the Fed's role in building a number of bubbles over the years that have burst and threatened recession is indisputable, and the Fed has come in to prevent recession with liquidity injection. No one who is an Austrian disputes this, at least they shouldn't. (Ron Paul may sound like he does, and I am a supporter of his, but he's not a perfect guy; he has a great understanding, but it's not as great as the actual economists themselves.)

However, what has accompanied this over the years of essentially a monetary system that essentially is a "inject the junkie so his withdrawal doesn't kill him" using credit creation out of thin air? Oh, yeah: MONSTROUS DEBT! That's never a problem, right? I mean, it's not like some of the most well-respected FIAT MONEY ECONOMISTS like, say, BEN BERNANKE essentially blame extremely high debt, which was made available due to the Fed's inflationary policies of the 20s, for the depression or anything! $13.6 trillion in household debt outstanding? $9+ trillion in government debt (which HAS BEEN enabled by money creation, due to the masking of the cost of government debt creation in the short term)? Heck, who even cares that the St. Louis fed stopped keeping track of the outstanding debt of government and private nonfinancial sectors back in 2002 at a point when private nonfinancial sector was THREE TIMES that of the national debt? (With little doubt that private nonfinancial sector debt dwarfed that of state and local government debt.) I mean, it's not like mountains of debt create anything like, oh... massive transfer of wealth, inequality, bankruptcies, devaluation of the currency due to interest payments abroad, decreased foreign investment due to confidence loss, the dumping of held currency around the world when it devalues (which perpetuates this bastardly cycle), or, God forbid, SYSTEMIC FINANCIAL CRASH AND DEPRESSION!

2. Financial institutions put moderate expectation of inflation in the interest rate offered. Fine; I'm with you here. I mean, this SURELY saves your ass with the ALMIGHTY CPI STATISTIC, WITH ITS BULLETPROOF ASSUMPTIONS OF AUTOMATIC SUBSTITUTION IN BASKET OF GOODS AND ITS ONE-SIZE-FITS-ALL BASKET ACROSS ALL CONSUMERS IN THE ECONOMY OF ALL INCOME LEVELS, DOESN'T IT? HOORAY! WE'RE HOME FREE!

Oh, and as G said: it's not like cheap credit produced by the Fed with artificially low interest rates and liquidity jacks promotes a major substitution of consumption for saving, or anything like that.

3. I think you got Dr. No on this one! Oh, wait... the devaluation of the dollar doesn't make imported materials more expensive, does it? And it's not like instability and expectations play a role in the level of export demand as well as inventory decisions, right?

4. Once again, built-in expectations of that bullet-proof CPI are here to save the day!

I mean, it's not like member banks of the federal reserve don't benefit from having MASSIVE increases in assets due to liqudity injection by the Fed, right? And nevermind that large financial institutions who are member banks are often sources of lending for other financial institutions. Oh, yeah: and loose credit policies by the Fed don't have ANY EFFECT on the access to liquidity for people like, say, UNSCRUPULOUS SUBPRIME LENDERS!

5. YEAH!!!!!!!!!!!!!! Monetary inflation does NOTHING to lower the real value of debt in the short run! Oh wait; that's right. It DOES! Glad I picked that up in Econ101, because for a while there, I was worried that the true burden of government debt, instead of destroying the economy when I'm about to start my first business 10 years down the road, was going to wipe out the economy NOW and my family with it as would be the case under a gold standard. Now, I can at least plan for when monetized debt nukes the American economy.

6. Damn, you're funny! So funny, I think we should just rip the entire Constitution up and give you sole monopoly power over the nation's money supply! Because you obviously are the intellectual almighty on monetary theory. I mean, hell, the Constitution promotes that people can decide what their own self-interest is and pursue their economic and personal lives accordingly. What a dumb idea when you have "progressive" intellectuals like yourself who can identify for everyone what their self-interest is and perfectly observe everyone's utility functions and every firm's production and cost functions! SLAVERY, I BEG FOR THEE!

7. Hold on a second, here. I believe you have argued the case before that a pure fiat system is necessary to keep up with increasing demand for money. How can you say that demand for money is always increasing and yet imply that, in a system with a commodity-backed money (particularly gold, which if set as a standard would primarily be used as currency and more minorly be used as looking pretty), demand for commodity-backed money would swing?

To close, I am not arguing for a "let's junk the Fed immediately and go back to the gold standard" case. Obviously, with the current account and trade deficits we have amassed, going back to a pure gold standard now would create massive gold flight and massacre the economy. I am in favor more of what Paul has actually proposed, which is to abolish legal tender laws and allow gold and silver to compete as currencies. (Along with abolishing capital gains taxes on the sale of the two assets.) This way, you give people options of what currencies they want to save and invest in (as well as currency to hold; and given that gold and silver have traditionally held their value well, there is reason to suspect that people would have more Precautionary and Asset demand for them rather than for the dollar) and give them opportunities to insulate them from risk of one currency devaluing.

Ideally, Dr. Paul (and I) doesn't believe the Fed should have been created and, in an ideal world, would have a gold standard in place today. But he's a lot more realistic and pragmatic than you give him credit for, as are many Austrians and hard money people.

Posted by Paige | December 20, 2007 3:12 PM

Now, here's the main reason Ron Paul is in favor of the Gold Standard, which you have failed to mention: The Gold Standard serves as a checks-and-balances measure between the people and the federal government, allowing the people to keep their government in check and honest about the money supply in the economy. Without this standard, there is no way to know for sure if the government is printing money or not, and one is left to trust the politician, an oxymoron in itself.

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

Um, the government does run the printing presses, dumb ass, and hands our money to the federal reserve. Do you know anything? Think how much prices would've dropped with real money. If you think the dollar has kept up with the price of gold why are you even writing here as you are obviously delusional? No one cares anymore what happens to the banks, banks be damned. Nobody has any money in them anyway, except the people printing it that you are defending for some reason. I'll volunteer to do the Feds job for them, we have people around here at the local paper that can run a printing press, and we'll just take half of what we print and the government (and the people) can keep the rest. What do you think? You are not credible.

Posted by David Smith | December 20, 2007 4:29 PM

Inflation is low??? Seriously, folks... should we not know better than to trust the fox guarding the hen-house?

Go to the gas pump. Look at grocery prices. Look at your exchange of tangible assets to financial assets, like the S&P 500 vs. barrels of oil since 2000.

Stop being hoodwinked by the politicized CPI which replaces or ignores inconvenient price increases, and turns price rises into declines when the "net good" of the product is deemed to be appropriate. Real inflation is closer to 8% +, not this fictional CPI that politicians use to quietly cut Social Security (happened under Reagan and Clinton) without a vote.

These charts sum it up

http://www.ernharth.com/2007/10/12/the-dollar-drop-not-just-a-currency-problem/

Posted by Ronnie H | December 20, 2007 5:16 PM

Everyone who thinks a barrel of oil costs $90 to produce and deliver raise hands. The REAL value is around $25-$30, if I'm not mistaken.

Close, but overly simplified. The last time I found numbers, sweet light crude from the Persian Gulf costs about $10/b to extract in quantity and oil of any grade costs about $30/b to extract from US sources. I don't recall what the price is on Siberian oil, but it comes out of the ground at a consistency resmbling pitch and isn't cheap to handle. In other words, the cost varies quite a bit by quality and consistency; profit, without which nobody would bother, occurs if you can sell it for more than that.

What this has to do with the market price for oil, however, I don't follow. The market price is being driven strongly by the usual mechanisms of scarcity and demand, specifically Chinese demand.

Posted by anony-mouse | December 20, 2007 5:51 PM

Wow! There are a lot of well written responses to this post. At the very least, I think we can all agree that the public discussion inspired by Ron Paul's monetary policy is good, and healthy.

Personally, I don't have anything against a fiat currency. In my perfect little world, the government would print money at the rate of real economic growth, and have no other income. This would keep the value of the dollar constant, and insure that the size of the federal government is limited to about 3% of GDP. Unrealistic? Yeah, probably. But the Fed has got to go. It is a private bank, with private interests. Which means that our economy is optimized for their benefit, not for the benefit of the people.

One long term problem that I see with the gold standard is space exploration. Gold is rare in the Earths crust, but abundant in asteroids. Within 2 or 3 decades, the cost of Near Earth Asteroid (NEA) mining will be low enough to make it a reality, at which point, the precious metals market will be flooded with gold, silver, and platinum from space... Or we could just cross that bridge when we come to it.

Posted by Tom | December 20, 2007 6:54 PM

I agree that this discussion is good and healthy. What Ron Paul has said numerous times is that first we need to get control of the government's spending which is Out Of Control. That battle is going to be rough enough, let alone unseating these "shadowy figures".

Posted by Dave | December 20, 2007 7:35 PM

I have to apologize. I've been critical of your posts but now that I read this, I realize you're the satire writer for The Atlantic. My bad!

The funniest one was definitely number one. You should've made that number seven since I was laughing so hard after reading it, I could barely make it through the rest. But, I guess leading with one that is provably false (even using the Fed's data) makes it obvious to the reader that it is satire. Funny stuff.

Posted by Andrew | December 20, 2007 7:44 PM

For some of the commenters who haven't realized this is satire, the gold standard and the fed are two separate issues. The Fed's monetary policy caused the recession and subsequent gov't policy made it into a depression, it had nothing to do with a gold standard. That's an entirely separate issue. Some people seem to think that central banking and the gold standard are one single issue. Not true.

If you want to really understand these issues, read as much as you can by Henry Hazlitt, Murray Rothbard and Ludwig von Mises.

Posted by Andrew | December 20, 2007 7:51 PM

Aside from the monetary issues, we as a nation should control spending and put an end to this empire we have built up. Why not restore our liberties and the constitution at the same time?

You may disagree with Paul on a few issues, but look at the big picture and the future. Nobody is perfect, but restoring the power to the people is a great start!

Posted by Erik | December 20, 2007 8:12 PM

We were on a gold standard when we had the Great Depression. That would seem to argue against its supposed beneficial attributes.

The government may have been on a gold standard then, but apparently the FED was not.
Also note that the Great Depression began sixteen years AFTER the creation of the FED.

AFTER!

Posted by Sam Grove | December 20, 2007 8:36 PM

Jack,

"Economics is not a hard science. And that's the problem. We try to pretend that the discipline is capable of the same level of rigor and confidence in its results of what is the cause and effect of various things as we might have with say physics..."

You are so right!! I soon learned while earning my BA in Economics that the discipline suffers from a severe case of "physics envy."

It should be more akin to biology...a science of observation. You should check out Veblen and the Institutionalists.

The conclusions I have drawn are 1) have the government do as little as possible relative to the economy and 2) make sure cartels and politicians have nothing to do with the money supply. There is no doubt in my mind (nor Bernake or Greenspans for that matter) that the FED caused the Depression.

If not gold, we need something help besides human manipulation through cartel regulating our money supply.

Posted by aaron | December 20, 2007 8:39 PM

Increases in productivity have masked the inflation rate.

We should be able to have our current standard of living with about 1/3 to 1/2 the current work week. Instead, the wealth we create is wasted on corporate subsidies, foreign aid, war making, our global empire, entitlements, etc.

This is what mainstream economics seems to ignore.

Posted by Sam Grove | December 20, 2007 8:39 PM

Dearest Megan,
Great strawman you have created here! First off, Paul is advocating the legalization of competing currencies, of which HE happens to favor the gold standard. Since ANY commodity could be used as currency, each would serve as a 'restrictor' upon the others - kinda like how we have 3 branches of government to restrict (supposedly) power accumulation. This means, that if for some reason Gold money were being 'hoarded' so as to cause the infamous 'deflationary spiral' then the use of other currencies to counter-balance would increase. Now, Gold has historically been the choice as a standard for currencies, BUT, we have much greater technical capability these days to not be restricted to only a single commodity (which does has its downfalls). I believe the new choice would be a basket of commodities, some people choosing perhaps a single commodity, and other choosing hundreds. The 'money supply' is then directly tied to ALL resources, not just gold, which overcomes your point about goods and services expanding faster than gold mining. This point of yours has a flaw in it anyways, the fact that a natural deflation as you describe is actually a GOOD thing - it represents the general benefit from being part of society and its progress in productivity and efficiency gains. It also confers a minor additional benefit towards producers as they are, in essence, 'creating wealth'.

There is always and everywhere a natural deflation occurring as people become more productive and efficient. We do not see these effects because they are masked by inflationary policies, the stealing of our productive gains by transferring wealth to those politically connected. Deflation is our Right! It is proportionate to our successful participation and contribution to society - our wealth increases exactly due to the expansion of productive goods and services. If I create a chair to sell on the market, and it is valued, then I not only gain the immediate profit from the sale, but also gain in that the money I have earned has respectively deflated due to the increase in goods (my chair) versus the supply of money. There are many types of deflation, and some of them are indeed 'bad' - but natural deflation is 'good' and unfortunately most folks believe there is only one kind of deflation and smeared the good with the bad. Sorry about the rant, had to say it.

Posted by LPM | December 20, 2007 9:19 PM

Jack,

"Economics is not a hard science. And that's the problem. We try to pretend that the discipline is capable of the same level of rigor and confidence in its results of what is the cause and effect of various things as we might have with say physics..."

You are so right!! I soon learned while earning my BA in Economics that the discipline suffers from a severe case of "physics envy."

It should be more akin to biology...a science of observation. You should check out Veblen and the Institutionalists.

The conclusions I have drawn are 1) have the government do as little as possible relative to the economy and 2) make sure cartels and politicians have nothing to do with the money supply. There is no doubt in my mind (nor Bernake or Greenspans for that matter) that the FED caused the Depression.

If not gold, we need something help besides human manipulation through cartel regulating our money supply.

Posted by aaron | December 20, 2007 11:33 PM

Ms. McArdle, it is apparent that you are unfamiliar with Dr. Paul's monetary views. As a member of President Reagan's Gold Commission, he co-authored a minority report published in book form in 1983 entitled "The Case for Gold." It is available online at http://www.mises.org/books/caseforgold.pdf When you read it, please pay particular attention to pages 177-193 (191-207 in the PDF), as they address many of your comments.

As for your point #6, I don't see how anyone can take you seriously after reading something that glib. If you think that Dr. Paul is advocating that Congressmen should mint coins, then I guess you are advocating that Secretary Paulson and Chairman Bernanke are in fact qualified to mint coins and operate printing presses. Or perhaps you believe that Congress' power to provide and maintain a navy requires them to be shipbuilders. You are in fact not advocating either of those positions, but rather setting up a straw man, and quite a smarmy, condescending one at that. If you would care to read the Coinage of Act of 1792 which established the Mint, http://landru.i-link-2.net/monques/coinageact.html you would see how the Mint is constitutionally organized. The Mint was operated by the Congress until the Coinage Act of 1873 unconstitutionally transferred the Mint to the Treasury Department.

Posted by pomofo | December 20, 2007 11:37 PM

EVEN ALAN GREENSPAN SUPPORTED THE GOLD STANDARD

Ron Paul's ideas are not that unique. IN the words of Alan Greenspan's article "Gold and Economic Freedom" originally published in 1966 and later in Ayn Rand's book "Capitalism: The Unknown Ideal" he concludes by saying,

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

http://www.financialsense.com/metals/greenspan1966.html

Posted by value195 | December 21, 2007 12:42 AM

Richard Ebeling on Friedman. The second item is Friedman's second thoughts on gold.
http://www.fff.org/freedom/0299b.asp
http://www.fff.org/freedom/0399b.asp

Posted by Sam