This is a bad start; anyone who uses the word "meme" is tentatively classified as a liberal yogurt-head. Or a pseudo-intellectual poser.
Under such a monetary rule, it seems the dollar is "as good as gold."
Here he's quoting the late Jude Wanniski. Wanniski was an idiot. He has a long history of backing the right decision for all the wrong reasons.
If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time.
This is a fair point, and it's really the whole substance of his argument. There's only one problem: folks who want a gold standard usually want to do away with centralized banks. If the federal reserve doesn't exist, then the "government" has nothing to do with the basis of our currency.
...there was a big increase in demand for gold, the one safe asset in this setting, which meant the relative price of gold must rise. If everybody is trying to hoard more gold, you're going to have to pay more potatoes to get an ounce of gold.
The use of the word "hoard" here is a dead giveaway. If I save money, am I "hoarding" it? This guy is a Keynesian, and believes in the asinine "paradox of thrift". If people want gold more than they want potatoes, then the price of potatoes will indeed fall--but that's one of the things that is necessary to get out of a depression! Only keynesian idiots think we can get out of a depression without any decreases in any prices or wages.
The longer a country stayed on the gold standard, the more overall deflation it experienced.
And deflation is a bad thing because...? Computers are cheaper than ever--yet computer industry profits are higher than ever. I'm sure the author knows this, and realizes that he needs to prove that deflation is bad, right?
Many of us are persuaded that this deflation greatly added to the economic difficulties of those countries...
I guess I'm wrong. Instead of proving it, he lets us know that he and his friends think deflation is bad. I'm like, so impressed.
A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable.
Yup, this guy (1) believes in central banks, and (2) is out-and-out keynesian. He believes that holding prices stable is important. The gold standard has nothing to do with "stabilizing prices"; the point of the gold standard is to prevent artificial inflation, whereby the owner of the printing press steals money by devaluing the currency. With a gold standard, monetary hijinks are prevented because people can run to gold if the currency is inflated. In that context, however, prices will still rise and fall. Increasing overall wealth translates into decreasing prices--i.e., deflation is quite normal.
1. What to do about silver? When the U.S. had a gold standard, post Civil War, most observers thought a policy of bimetallism was unworkable. It would require pegging the price of one metal to the other. Any time metal markets moved to higher gold, silver would drive gold out of circulation (Say's Law, I believe).
2. If you don't adopt bimetallism, political pressures will develop to do so, just as they did in the late 1800's (William Jennings Bryan). What happened was silver purchases by the Treasury -- 1890 Sherman Silver Repurchase Act -- to placate the easy money crowd. When the budget ran a deficit back then, the purchases threatened to force the government to redeem paper with silver rather than gold, effectively forcing conversion to a silver standard.
3. Conversion to a silver standard then destroys the fixed exchange rate which is one of the original purposes of a gold standard. Currencies are then revalued accordingly, depriving investors of what was originally sought, a guarantee of non-depreciation of the currency.
4. Under a gold standard, when the gov't runs a surplus, its drains gold from the economy, making it difficult for banks to keep necessary reserves on hand. The banks then have to call in loans, precipitating an economic tightening, raising interest rates, lowering prices on capital markets for stocks and bonds. Gov't deficits work in the opposite direction, with the potential inability of the gov't to redeem its currency in gold. This is why Nixon took us off finally in the 70's.
They found it was very hard to have a balanced budget back in the late 1800's, when things were much simpler than today. Would be near impossible to do so now I imagine, so surpluses and deficits would have the same harmful consequences they did in our previous experience with gold.
Can these problems, which are based on our actual experience, be overcome?
Posted before commenting on the rest: excellent points all-around, thanks.
Thanks. Nice job! Otherwise I would have had to.