Posted on 11/09/2010 4:09:58 AM PST by expat_panama
I almost spat my coffee across the room when I saw the headline plastered across the front of the FT this morning: Robert Zoellick, president of the World Bank, is calling for a debate on the return to the Gold Standard, it said. Of course, when you read the column upon which the news story is based (subscription only, this being the FT), it is far less clear that Zoellick really wants a return to the 19th century international macro-economic structure. Instead, he merely seems to have namechecked gold as a possible mechanism to help us wean ourselves off our reliance on the dollar as the world’s reserve currency.
But let’s pretend for a moment that he is being serious about a return to the Gold Standard. What would that mean? The easiest way to understand the consequences is by considering what economists catchily call the “International Macroeconomic Policy Trilemma”. It goes as follows: you can have any two of the following at any one time: fixed exchange rates, capital mobility and independent monetary policy. You can’t have all three.
As the chart below (courtesy of Dani Rodrik) shows, for the last few decades (since 1971 and the final nail in Bretton Woods’ coffin) we have sat on the right hand side of the triangle, with floating currencies and untrammelled capital markets (in most of the Western world at least). The Gold Standard era involved the free movement of capital and fixed exchange rates, but in exchange for this the members had to abandon any pretence of being able to control their own domestic monetary policies.
[snip]
(Excerpt) Read more at blogs.telegraph.co.uk ...
In real life we are in fact able to get the $100 whenever they want. That means it's not couterfeiting.
You realize when you put money in the bank that the reason you receive interest is because the bank is loaning a portion of your funds, right?
Both parties have a claim on that $90 that the bank no longer holds.
The borrower doesn't have a claim, he actually has the $90. The depositor has a claim.
No. The fact that this works most of the time, does not change what is actually happening. When, enough people wish to get there "deposited" money back, the fraud is exposed. But the fraud is present right from the start.
Central banks, as lenders of last resort, would allow the bank to give the depositors their money back.
You realize that this has nothing to do with the question, which was how does turning a $100 deposit into a $100 claim and a $90 loan equate to counterfeiting, right?
Are you shocked that banks accept deposits so they can make loans? And that they don’t have a printing press and that a comparison to counterfeiting is ridiculous.
You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house; that's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
I'm shocked, shocked to find that lending is going on in here! ...
Conway is wrong: dead wrong.
First of all, the Gold Standard does not depend on the amount of gold in the world. The price of gold will rise, which accomplishes the same thing. The nominal value of basic currency does not matter: that is, whether you are spending thousands of Lira or Yen, or a few dollars on lunch, makes no difference, OK?
It is true that there might not be enough gold to be passing it around in the form of coins; but it would be easy to have circulating money exchangeable for gold at a fixed rate. The point is that government would then not be able to inflate currency on a whim, or because of political aims.
Conway assumes that when there is a credit problem, the government must expand the money supply to deal with the problem. For the love of Pete! By now we should know that this only fuels the next bubble, and that it is much better just to let the value of money increase (meaning, let the price of goods become gradually cheaper). As von Mises wrote, the whole game is to get cheaper goods, to improve the lives of people.
Keynesians seem to believe that prices must always be increasing, so that producers (i.e., the public) will be fooled into thinking that they should produce more goods. This never has worked, and in today’s word of rapid interchange of knowledge, it is even less likely to work. Take, for example, the Fed’s plans to flood the economy with more paper money: we know what is going on, and worldwide markets have already taken this into account. No one is fooled into tooling up for more production in order to capture more of these inflated dollars. The trick does not work. Furthermore, the capital market is disrupted, saving is discouraged, and the tampering with interest rates (for political purposes) misdirects capital into uneconomic endeavors, which is exactly what caused the recent housing bubble. “Monetary policy” generally is harmful, because people ignorantly clamor for action, when leaving things alone and letting markets adjust is always the best policy.
Conway expresses the fixation with government control. That is the opposite of what we should want, judging by history. All we want and need is honest money: and gold (or anything similar, like platinum or palladium) forces everyone to be honest, precisely because its quantity cannot be easily and arbitrarily altered at the whim of “regulators.”
Conway mentions democracy, which has nothing to do with good economic policy. People can very democratically vote to go to hell (economically speaking), if they wish, and if the governmental “regulatory” mechanisms allow then so to do. The Gold Standard, however, forces even the demos (people) to face reality. It actually helps the people avoid the demagoguery of leaders who pretend to want to “help” them.
If we were to follow our Constitution, we would find that the legal mechanism for limited government is already in place, and many of the political games would go out of fashion quickly. We would have a freedom largely than that which can be provided by “democracy” or any other substitute system.
The ideal is to let people grow up as adults, and live their own lives in freedom, without the direction of self-styled rulers and “regulators.” And without the hectoring of unworthy do-gooders.
After the fall of the USSR, an American reporter on the streets of Moscow interviewed citizens, asking them why they had turned against the regime. The best response, given by a young woman, did not mention “democracy” as such; nor did she even refer to the tens of millions murdered by the regime; nor the gross economic inefficiency. Those things had not caused the actual fall of the Soviet system. What she did says was, “They treated us like children.” She was correct! As long as we, also, put up with being treated like children, we will never mature into adults, capable of leading our own lives creatively.
I simply explained how they turn a $100 deposit into a claim on $100 and a $90 loan. Of course they do not have a printing press, but I did not say that is was counterfeiting, I said it was like counterfeiting. Your answer that the central bank stands ready to make the depositor good should the loan default, is where the actual printing would take place.
Now, if the banker made loans from time deposits, a CD for example, that is different. Because the depositor gives up his claim for a specified period, the banker may loan that money for a similar period of time without creating the problem described above.
You know the reserve requirement on CDs is zero, don't you? If the borrower defaults, the CD holder gets zero. At least in the original case, the depositor has $10 available.
I guess we shouldn't allow deposits and loans?
One more time, loaning of demand deposits is like counterfeiting. Loaning of demand deposits is not. Reserve requirements have nothing to do with it. In one case the bank is promising to redeem a claim on something it does not have, in the other the depositor VOLUNTARILY gives up his claim for a specified period of time.
The bank can sell the loan or borrow in the Fed Funds market in order to redeem your deposit. No counterfeiting involved. So what's the problem?
I didn't read the article. I don't need to.
It's obvious that the author thinks the politician standard is better than the gold standard. Now all our dollars depend upon the promise of some group of politicians somewhere not to print too many more dollars. If the politicians' country dies their dollars will be absolutely worthless. (One might say that they are already tending in that direction.)
Gold depends upon the promise of no one. Its value has survived all those countries now on the ash-heap of history.
ML/NJ
Let's understand that changes in prices matter a lot and that it's congress' job to keep prices stable.
"...government would then not be able to inflate currency..."
We had worse price instability with gold than we've had with the fed. With gold we had double digit inflation one year followed by extreme deflation the next.
If we were to follow our Constitution...
Look, let's not get into which of us loves the constitution more (and I really don't want to hear about anyone's superiority with the Bible for that matter either). Controlling inflation's covered in Article III Section 8: "The Congress shall have Power To... ...coin Money, regulate the Value thereof..." and if Congress decides to hire Bernanke to do the day to day heavy lifting that's their call.
We got lots in common. I didn't read your post.
We don't want to confuse inflation with exchange rates. We can have inflation inside the US with a strengthening dollar. The question we're working with is just how we want the two to be handled and how much effort we want to put into it. My vote is for stable prices with free market exchange rates.
But apparently not brains.
ML/NJ
I don't see where that would be a problem because everything else scales the same. The value of my home goes from 100k to 50k, but that same dollar that is now worth half as much can now buy twice as much. I'll admit I don't understand the entire argument against a gold standard, I simply don't. But if making my property worth half as many dollars means the value of the dollar is double, all things are equal... it doesn't matter. The only real question seems to be; what do we do with all of the cash in circulation... we can't simply make everyones money worth double overnight. That would be an obvious catastrophe. The printed money isn't the problem, simply trade it in.. it's all of the electronic money that is the issue. At least this is the way my simple mind understands it.
You still owe 100K on the mortgage.
But if making my property worth half as many dollars means the value of the dollar is double, all things are equal... it doesn't matter.
The company you work for borrowed $100 million to expand production. Now all their products sell for half. Is that a problem?
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