Joe Weisenthal over at Business Insider is no friend of gold.Â He frequently pulls a Keynes and attacks the precious metal as a “barbarous relic” while accusing proponents of the gold standard as cranks.Â In a recent post praising Federal Reserve chairman Ben Bernanke and a lecture he gave to students at American University over the origins of central bank, Weisenthal really let’s gold have it.Â I will address the simple criticisms in order.
To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It’s nonsensical.
Being that all consumer goods, when traced back completely, come from the mixture of land and labor, attacking gold for having the same origins as any other good in existence is pretty embarrassing.Â It’s akin to saying Hitler was a despicable human being because his mother gave birth to him.Â But of course Weisenthal misses the point that the time and capital intensive process of mining and minting gold is a redeeming quality rather than a downfall.Â Gold was supposed to serve as a check on continual money printing by central banks and prevent the type of cronyism prevalent in cartelized banking.Â Â Money, either government fiat or gold based, is not neutral and effects the first receivers positively as it enters the economy and distorts relative prices.Â Those who benefit financially from legal tender laws and government imposed monopolies over currency creation end up being the politically favored banker class.Â This is why central banks are often the creation of elite bankers; the Federal Reserve is no different.Â The current author is still waiting for pro-central bank types to rectify their devotion to the fascist nature which is a dominating feature of all central banking systems.Â Perhaps Weisenthal has a framed picture of Mussolini in his office.
The gold standard ends up linking everyone’s currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they’ve fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.
To take issue, like Weisenthal does, with countries not being able to adjust currency exchanges, one must assume that countries themselves actually conduct trades.Â Since countries are only ever composed of individuals who engage in trade with individuals in other countries, fretting over national governments being unable to adjust their currencies (read: inflate and devalue) means fretting over governments being unable to engage in currency wars.Â Yet trade is always mutually beneficial from the individual perspective less it would cease to be committed in the first place.Â What Weisenthal really means to say is that under a true gold standard, inflation can’t be used to goose the export industry at the expense of the rest of consumers.
It creates deflation, as William Jennings Bryan noted. The meaning of the “cross of gold” speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.
Weisenthal’s knowledge on money and history is truly lacking.Â First off, any type of money can appreciate and therefore cause deflation.Â This phenomenon isn’t unique to gold.Â As time preferences lower and more people begin holding on to money and deferring from consumption, that money becomes scarcer and thus more valuable.Â Prices then fall till the markets clear and spending increases.Â This is true for paper standards, gold standards, or pig standards.Â Second, William Jennings Bryan was a tool of Southern and silver-rich Mountain state interests.Â As Murray Rothbard remarked
The Greenbackers and later the pro-silver, inflationist, Bryanite Populist Party were not “agrarian parties”; they were collections of pietists aiming to stamp out personal and political sin.
Bryan’s opposition to gold was anything but economically based.
The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.
Weisenthal contradicts a previous point with this one.Â If deflation occurs in the midst of a downturn (which Weisenthal sees as bad- no mention of previous inflationary policies which lead to subsequent deflation) then that means people are maintaining and adding to cash balances.Â In this case, interest rates should drop as long as more money is sitting in banks.Â The supply of loanable funds increases, thus driving down the borrowing cost.Â This is just one feature of the market’s mechanism for adjustment. It’s hard to know what historic instance Weisenthal is referring to as he doesn’t give one.Â But if he was referring to the Great Depression or other financial crises which occurred within the 19th century or early 20th, then Weisenthal is thoroughly confused on what a gold standard really entails.Â For it was fractional reserve banking and the Fed’s policy of printing far more money than it had in gold reserves which caused the downturns prior to Nixon finally shutting the gold window.Â Whatever interest rates were relevant at those times were distorted by a non-adherence to a gold standard.
The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).
Again, those recessions and depressions prior to the Fed were caused by fractional reserve banking and perverse financial regulations at the state level.Â Tom Woods elaborates
Moreover, the postâ€“Civil War panics in the United States were due in large part to the unit-banking regulations in many states that forbade branch banking of any sort. Confined to a single office, each bank was necessarily fragile and undiversified. Canada experienced none of these panics even though it did not establish a central bank…until 1934.
The simple fact that the biggest economic calamity of the past two centuries, the Great Depression, occurred under the guidance of the Federal Reserve seems to escape Weisenthal’s narrative.
The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there’s a hint of another priority (like falling unemployment) it all falls apart.
Huh?Â Who said central banks need to exist to establish a gold standard?Â The gold standard was a product of market participants voluntarily choosing the metal to facilitate transactions.Â As Mises pronounced
, “The superiority of the gold standard consists in the fact that the value of gold develops independent of political actions.”Â It’s hard to make sense of the second sentence.Â Is Weisenthal saying that the minute central banks start inflating beyond gold reserves to elevate prices or boost employment, that the economy instantly falls apart?Â This is certainly true as an end result but such actions take time to develop.
Gold standards leave central banks open to speculative runs, since they usually don’t hold all the gold.
Welcome to the fundamental problem with fractional reserve banking Joe!Â Bank runs do indeed occur when the public suspects their money certificates are not redeemable in gold.Â This is not a bad thing however but a great reactionary tool to force banks to be more prudent with their fractional reserve lending.Â In our world of government guaranteed reserves, banks now have Joe Taxpayer to cover their losses if they should create too much money out of thin air and find themselves in a contractionary bind.Â Moral hazard thus runs rampant as the ideal business model is distorted in the favor of bankers.
While Weisenthal was echoing many of Bernanke’s arguments against the gold standard; no doubt he shares the same feelings.Â Gold standard critics are a funny bunch as they see the metal as the catalyst for financial crises when the policies they endorse are the true sickness.Â If these are Bernanke’s, and Weisenthal’s, best arguments in opposition to the gold standard, then maybe the following chart is all that is needed to refute them:
To see a good take down of Bernanke’s lecture, see Robert Wenzel
Tags: Ben Bernanke, Business Insider, Gold Standard, Joe Weisenthanl