Why we shouldn’t gather around the gold standard
Probably after his stance on the Iraq war, the issue that most prominently sets Ron Paul apart from the rest of the field of the US presidential candidates is his view of currency: particularly, his belief that the government should reinstitute the gold standard to avoid the so-called ‘inflation tax’ caused by seigniorage. Perhaps due to the importance placed on the issue of sound money by Paul and other prominent libertarians, one of the most active threads [registration required] at the UK Libertarian Party’s forum is in the same vein.
However, I’ve avoided the discussion for reason of disagreement(perhaps counter-productive, but the day’s only so long, and I don’t have as much time to argue the toss on internet fora as I once did!). The rallying cry of ‘Safety in Gold!’ is a common one amongst libertarians, but it simply doesn’t add up. As Milton Friedman was eager to point out to those that thought gold a suitable refuge (as, indeed, the world’s governments did when he wrote Capitalism and Freedom), to link the value of money to a single commodity is insanity.
The most obvious economic argument against the gold standard is that value of gold, and indeed of any commodity, is it has no inherent or eternal value. Production technologies change in different industries at different rates, and, should mining benefit from a great investment or miraculous technological progress, the price of gold would slump, leading to inflation in a country stuck to the gold standard. The same problem applies if silver, oil, electricity, or other commodities are used as benchmarks.
To solve this problem, one would have to find a commodity that increases at exactly (or close above, if the target is small positive inflation, as can be easily justified) the rate of economic growth. As Friedman argued, the Great Depression, by and large, occurred because the money supply grew more slowly than the rate of economic growth during the 1920s: due to the gold standard. Since no commodity will increase in circulation at the same rate as economic growth, a commodity-backed currency can’t work as flawlessly as its proponents claim.
The truly libertarian solution would be to scrap the legal tender, remove any obligation on individuals interacting with the government (mostly paying taxes, etc) in sterling, and let them trade in whatever currency they see fit. A similar system existed in the 19th century; in the absence of legal tender, Spanish and Mexican silver dollars emerged as the currency of choice in east Asia, whilst the local currencies - debased by their rulers to raise currency through seigniorage - were rarely used except where dollars weren’t available.
Currency competition puts an incentive on the government of a given country to protect the value of its currency, lest people cease to use it as a means of exchange. If a government does guard the value of its money better than its competitors, it can use a limited degree of seigniorage to cover some of its operations (the ‘profit’ of being more efficient in the market of issuing currency, if you will). This would be a tax that affects only those that choose to use the currency out of their own self-interest: another way the state can raise money without coercing anyone.
I think competition is the true free-market response, and the one that libertarians ought to follow, rather than foolishly backing a government monopoly tied to the value of a lump of shiny metal.
Categories: Milton Friedman, Ron Paul, alternative government financing, monetary policy
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Tristan Mills said,
January 22, 2008 @ 2:55 pm
The main reason for Mises’s metallism was to prevent the government messing around with the money supply as they did under the gold exchange standard and they do under fiat systems.
I wonder what he’d think in today’s world of electronic commerce. Metallism won’t work today as far as I can see, and government monopoly will enable government to mess with money whatever.
So, even from that view, free banking seems to be the best solution.
From what I’ve seen, Ron Paul may be a gold bug, but his policy proposals are more subtle and involve allowing competing currencies and dropping the taxes and restrictions on gold which make it impossible to have a gold standard even with free banking.
Patrick said,
January 22, 2008 @ 3:43 pm
> Oli wrote:
> …the most active topic of discussion at the Libertarian Party’s forum is in the same vein. However, I’ve avoided the discussion for reason of disagreement…
Your input at the forum would be valued — we can only learn through listening to each other.
> As Friedman argued, the Great Depression, by and large, occurred because the money supply grew more slowly than the rate of economic growth during the 1920s: due to the gold standard.
Friedman’s view is not universally shared. For example, see http://www.mises.org/rothbard/agd/contents.asp#contents
> The truly libertarian solution would be to scrap the legal tender, remove any obligation on individuals interacting with the government (mostly paying taxes, etc) in sterling, and let them trade in whatever currency they see fit
Yes, but. The big but is that of public acceptance of any new form of currency. Given the choice between a well known existing currency — sterling, presumably backed by the state — and a new currency, many people would stick with what they know, warts and all. You could argue that this would change over time. However, time is not something that anyone proposing major structural monetary reform would enjoy — governments change, and slowly acting reforms can be neutered or reversed.
I believe that this is one of the main reasons for Paul advocating the position that he does. He wants change, permanent change.
It’s worth noting that Paul’s position is not ‘the’ Austrian approach. As you might expect from any broad school, there are several takes on possible approaches to the problems that you have written about. A good overview of the differing solutions that have been proposed can be found in this article by Herbener: http://www.mises.org/journals/qjae/pdf/qjae5_4_1.pdf
draq said,
January 28, 2008 @ 7:30 pm
Concerning the circulation of Latin Amercian silver in the Far East in the 19th, in case China is also included:
The “currency” in which taxes were levied was silver, whereas the common “currency” used by the population was bronze. Through the colonialist wars (e.g. opium wars) and the resulting indemnities to be paid in silver to the colonial powers, the exchange rate of bronze to silver changed dramatically, finally rendering the peasants unable to pay taxes. Conclusion: Government’s inability to regulate the currency results in a miserable state.
Do you regard Euro as bad since it eliminates the plurarity existed before?
Why do I not see a link to Cato Unbound on the blogroll?
Ian B said,
January 30, 2008 @ 3:46 pm
Okay, as someone untrained in economics, here’s a question. Why not simply tie the currency printing presses to GDP? If we can accurately, or reasonably accurately, measure growth in GDP, can we not simply increase the money supply by the same quantity? Suppose GDP is measured and has increased by 3% over the past year (of course we could be finer grained about this, measuring it per month if we like) then we simply increase the money supply by 3%. If GDP falls for a while, we can either stop printing money until it catches back up with our known money supply again (a temporary inflationary period?) or we can withdraw money from the supply via the banks (is this practicable?).
Is real world measurement of GDP realistic enough to do this?
IOW, liquidity is pegged strictly to some proportion of GDP. What’s the problem with doing this?