Wall Street Journal touts for a Gold Standard

This article in the Wall Street Journal, whilst perhaps offering a little too much hyperbole, none the less gets to the crux of the matter. An extract below;

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit — currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt — we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year’s crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

“There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan’s earlier days as an Ayn Rand acolyte; his article on “Gold and Economic Freedom” appears in her 1966 compendium “Capitalism: The Unknown Ideal.” But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer’s question: “Why do we need a central bank?”

18 thoughts on “Wall Street Journal touts for a Gold Standard

  1. In terms of capitalism being doomed I’d argue that in fact the end of the Bretton Woods Gold Standard was more damaging to Soviet communism because planned economies with planned prices rely more heavily on a stable unit of account than capitalist economies. None the less I think capitalism does far better with a stable “unit of account” than without.

  2. Is gold more stable? If so, how sure can you be that it would remain so? Do you agree that everyone would have to get on the gold standard for it to work?

    PS I always thought it amusing that Greenspan wrote so blisteringly about the Fed Reserve in Unknown Ideal and ended up running it.

  3. Is this an endorsement of the gold standard (an international balance of payments system) or the free banking era of new York, Canada, Australia etc?

    This seems a strong endorsement for free banking. I would say that banks should be able to settle their own balances, and the unit of account is a matter for national Governments.

  4. Mark – I think it is an argument for both free banking and a gold standard. ie banks settle their own balances and national governments use gold as the unit of account.

    Jarrah – I think it is better if all nations share the same unit of account (assuming it’s the correct one) but the current era clearly shows it isn’t essential. It would be hard for a small nation to go it alone on a gold standard unless perhaps if it’s exports included a lot of commodities. The US or EU or China could certainly do it alone.

  5. Jarah – gold under a gold standard generally remains stable because inflation squeezes the profit margin on gold mining (to zero if necessary) whilst deflation increases the profit margin. As such the system includes automatic long range stabilizers.

  6. Absolutely right. But it the first instance the fiat must give way to not just gold. Yes it might be a 100% backed gold standard. But to take up all that fiat in the first instance we need a whole line-up of commodities.

    We need to get rid of fractional reserve in all its forms.

    When a coiner goes to buy his raw material he must buy it when its right down from its peaks. He must buy it when its oversold. He must buy in the dips. Because he will use it for his coining machine and he has to buy it at the right time or else he will find it hard to make a profit.

    So its natural for monetization of commodities to simply support the extraction industries from going into their lows. Its not about blowing out the price of any given commodity. But merely buying into the dips.

    It is for this reason that we cannot rely on Gold alone to get rid of this disgraceful, disgusting and shabby fiat money and we cannot rely on gold alone to get rid of fractional reserve.

  7. A gold standard would prevent governments from manipulating the exchange rate. It also prevents currency debasement due to ‘printing’.

  8. If the L&D party had been calling itself the Gold Party, think what free publicity this would be giving them!

  9. Graeme,

    The currency is already adequately backed by assets. You can appoint gold as the measure of value without changing the assets classes that back the currency. So in Australias case we could still back the Aussie with bonds, Euro, Yen and Greenbacks whilst fixing the rate of currency creation / destruction so as to stabilise the price relative to gold.

    If you thought that 100% gold backing was preferable you could then over time swap out the assets backing the currency. If the Europeans, Japanese and Americans also went on a gold standard and decided to take the same approach then the foreign currency assets would mostly self extinguish. In other words as the Japanese sold off their Aussies we would need to mop them up to maintain the gold price. We could mop them up using our Yen. In the end there would be less Aussies on issue and less Yen in our vault.

    I wouldn’t ban fractional reserve banking but you could take my approach to a gold standard as a gateway to your preferred destination. I’d just get off the bus earlier than you. However at least we could share the price of the ticket part of the way.

  10. Nicholas – I agree, however I don’t think the LDP is ready for a gold standard policy. Some people would feel that it is too much of a fringe issue. Personally I think monetary reform is central to making capitalism popular again, however there is a lack of concensus on the detail.

  11. TerjeP (can I call you Terjep?), maybe the L&D party could simply adopt gold as its’ colour? We can keep gold metal standard as a low-priority policy, until people are ready for more solid economic food.

  12. When the colour is chiefly Gold, And the second name of the party is the Gold Party, then we’ll be making progress.

  13. Pingback: Club Troppo » Money and Meteorites

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