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.

When he passed away in 2006, Milton Friedman was rightly mourned by all, but by none more so than libertarians.  To us, he was nothing short of a hero.  His Capitalism and Freedom has become a classic in defence of both economic and civil freedoms.  In Counter-Revolution in Monetary Theory, he wrote the oft-quoted principle behind monetary policy:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

These words, sadly, seem to have been lost on the vast majority of economics students today.

I’ve never claimed to have any high expectations of my fellow economics students.  In fact, I barely mask by outright contempt for the vast majority of them, who fill their otherwise empty heads with propaganda spouted by the leftist lecturers in the hope that it’s their passport to a job at an investment bank.  Today took the biscuit for sheer stupidity.

In a hall of over 200 second-year economics students, not a single person ventured the correct answer to the question, “In medium-run equilibrium, what is the inflation equal to?”  OK, I’m sure some people knew the answer but couldn’t be arsed to say it.  After all, I was in the class myself, but I far too interested in seeing long it would be, and how many ridiculous answers would be proffered, before we’d somebody would guess the right one (I have to get inspiration and amusement somehow!).

It was a long time.  One third-year student, with a job at a top investment bank waiting for him on graduation, thought that it was the same as equilibrium output.  Inflation and GDP are the same?  God, help us all…

Of course, Milton Friedman was right.  By the Fisher equation, inflation is the growth of the money supply above what the real economy can support.  If the money supply increases by 5%, but GDP increases by only 3%, inflation will be 2% [Very roughly.  I’m taking some liberties, but not nearly as many as the aforementioned halfwits].  This very simple relation is lost on a year of student economists.

Judging by the Daily Mail’s front page on Tuesday, it’s a relation lost on far more.  Apparently, we can cure all our woes by reducing interest rates.  By reducing the interest rate, the government increases the money supply, leading to spiralling inflation as outlined above.  That’s a good solution for the Daily Mail’s readership of home owners, who beg for government-induced inflation to pay off their huge mortgages for them, but it’s pretty shitty for the rest of us, and, in the long-run, the economy as a whole.

If one assumes that the state does have a role in controlling the currency (and there are sound economic arguments against it), the Bank of England’s first priority should be defend the value of the currency that it requires its citizens to hold as sacrosanct.  They’re bankers: their job is to keep money safe, and that means not destroying its value.

To do that requires a knowledge of monetary theory that is sadly lost on them, on the Daily Mail, and, judging by the current crop of UCL undergraduates, on the next generation of hedge-fund managers.

Sorry for the misleading title, but I’m not going to comment on Alan Greenspan.  He’s plugging his new book so thoroughly, that you’ve probably had enough of him, so I’ll focus on the interviewer.

Jon Stewart’s interviewing technique has been criticised unsuccessfully before. So, in attacking his ridiculous questioning of one of the world’s foremost living economists, I won’t be the first or the last.

They’ve made a choice: “We would like to favour those that invest in the stock market, and not those that invest in the bank. That helps us.” … It seems to me that we favour investment, but we don’t favour work. The vast majority of people work, and they pay payroll taxes and they use banks.

And there’s this whole other world of hedge funds and short-betting. It seems like craps. And they keep saying, “No, no, don’t worry about it, it’s free market. That’s why we live in much bigger houses.” But it isn’t, it’s the Fed.

So, apparently, the Fed deliberately keeps the interest rate low to help rich people? Basic economics - nay, common sense - dictates that the opposite is true. High interest rates increase the return on capital, hence the value of money. By definition, the rich have more money.

As a result, wealthy people ‘benefit’ from high interest rates relative to the poor. That’s why the Guardian always bleats on about the Black Wednesday rate hikes; it hit their readership of poor students and failed artists hard.

Sadly, this sort of misrepresentation of economics is a hallmark of the left.  Whatever one thinks about state control of monetary policy, the accusation that the victims of the state don’t cut across wealth lines, and include only the poor, is absurd.

You’re a great comedian, Stewart. You’re just not the best economist. Stick to the funny stuff.  No matter how risible your politics, that doesn’t count.

I’ve just been alerted to a ridiculous inept and hysterical editorial by Trevor Kavanagh on the run on the Northern Rock. I really hate having to delve into the Sun more than I have to. Its snivelling little pages, each one filled with more opinion and less fact than the last, make me want to wretch. But, if 3.5m Britons can stomach it, I guess I can, too.

Nobody knows what’s out there. And if they do, they aren’t telling us.

Way to cool the hysteria, Trevor. “Something is happening. We don’t know what, but we know it’s bad, because it’s to do with rich people.”

The facts we do know are both incredibly complicated - and alarmingly simple.

Trevor knows his audience. If you’re interested in ‘incredibly complicated’, don’t read the Sun. If you want alarmist and simplist, read on.

Greedy, immoral bankers dished out cash they didn’t own in reckless loans to millions of poor folk they knew couldn’t afford them.

Bad bankers. Greed is bad. Money is immoral. Sorry, that’s a bit glib. Populist drivel, but glib nonetheless. So, let’s get this straight. The “greedy, immoral bankers” loaned money they didn’t own to “poor folk” - who spent money they didn’t own on new kitchens and holidays in the Algarve.

Heck, the bankers even KNEW the poor people were, well, poor, despite that fact never occurring to Mr and Mrs Ecclethorpe when they were on the 16th green in Albufeira. Man, those credit ratings are good. So the bankers must be the guilty party. Or, maybe it was the poor folk that chose to borrow the money in the first place. The poor folk that knew their own circumstances better than anyone else, and accepted the responsibility for their own actions by signing the contract. Naughty bankers.

Northern Rock is not alone. Barclays Bank is in trouble. So are other global giants.

Barclays is really in trouble. They’re losing money all over the place. And they’re really on the defensive. Yeah, right. Mr Kavanagh read one story about Barclays needing an emergency loan - to remedy a technological bank clearing error - and he thinks it means they’re on the brink of collapse. Leave the business news to the business men, sonny.

During downturns, interest rates were kept low, tempting us to borrow beyond our means as unscrupulous banks offered FIVE times what we earn. And if we exaggerated our income, they didn’t probe too deeply.

You lied to a bank about your salary to secure a mortgage, and they’re the unscrupulous ones?

But, let’s be fair to Trevor Kavanagh. He’s not a business reporter, but a political reporter. Well, I say ‘reporter’, but ‘rambler’ is probably more appropriate. His analysis gets better when he returns to the political rambling.

And governments encouraged us to [borrow ridiculous amounts] despite abundant warnings we were living beyond our means.

Correct. We had abundant warnings. However, the government’s ridiculous low interest rates were set, for political purposes, lower than they should have been, resulting in a spike in inflation. Now, the Bank of England has realised its mistake, increased rates closer to their natural equilibrium position, and dumped everyone up crap creek. Hooray for government intervention in the economy.

Hanging on to our own money, Gordon Brown decided, meant less tax for his stupendously inefficient spending spree on public services.

I don’t even know where the causality is there, but I agree that the supposedly ‘public’ services are stupendously inefficient. And that Gordon Brown is a nonce.

For the first time in a decade, we are hearing doubts about the economy, which is so deeply in debt. The timing could not be worse. Especially for anyone thinking of an autumn election.

If only Kavanagh had said this first. Of course it’s bad news for Gordon Brown. He’s screwed us all over by failing to contain himself in the Treasury, and pressing the big scary red buttons and pulling the big crackling levers that any economist could have told him not to touch. Sadly, Brown was a politics lecturer, not an economics lecturer, because that could have saved us an awful lot of trouble.

The Sun’s argument is weak, and terribly nauseating. Populist drum-beating, propagated by Kavanagh in the editorial, is the worst kind of so-called ‘journalism’. It’s just three bad news stories strung together, and, hey presto: a week’s editorial done and Trevor’s cheque’s in the post. But, it must work, because stupid people love bad news (how else could you explain the Sun’s decision to put Madeleine McCann on their front cover every day for the whole summer?). The problem is, it’s a morass, just like the economy. If only, like Brown, Kavanagh had stuck to politics, rather than venturing into, and screwing up, the economic side.

Today, Conservative Shadow Chancellor George Osborne announced his party’s plans for reforming state economic governance. In a wide-ranging speech, he called for, amongst other changes, a dramatic shake-up of how the Bank of England’s hierarchy, including limiting the Governor to one term, and making Monetary Policy Committee member selection a transparent process.

There are very good arguments for the state to have no say in monetary issues whatsoever. A central bank is a monopoly supplier of fiat money, forcing upon the people (à la Kublai Khan) a financial regime that may, or may not, be in their interests; in particular, a state that is indebted may force the people to accept a monetary regime that devalues money (à la the Weimar Republic), hurting the individual’s interests. However, if one assumes that it should control the supply of money, it is of paramount importance for the process to be an open and fair one, incorporating the best economic minds the world has to offer.

In that respect, the reforms that the Tories propose are a mixed bag. The idea that the state has any right to operate behind a cloak of secrecy, whilst forcing its will upon the people, is an absurd idea, and, hence, Osborne is right to support open MPC selection. However, there is absolutely no reason to limit the Governor to a single non-renewable term, except for political reasons.

Alan Greenspan (who is, incidentally, now an unpaid advisor to the Bank of England) did a fantastic job at the USA’s central bank, the Federal Reserve, over a period of nineteen years. However, had he been limited to a single term, rather than been allowed to be reappointed by three successive Presidents, the United States economy would be in far worse shape than it is today.

In effect, term limits work in the opposite direction, to transparency; they force upon the citizens a sub-premium choice by limiting their options. At least, if we are to be governed by a statist monetary regime, let it be transparent. But, above all, let it maximise its efficacy by not forcing itself to choose an second-rate greenhorn over a first-rate Greenspan. One of the Shadow Chancellor’s proposals is in that vein, but the other, sadly, is not.