The Bloj

The Fed - not that bad. The gold standard - not good.

Posted on March 23rd, 2008 by Chris.
Categories: Chris, Politics.

I feel obligated to write this because I’ve seen so much talk on the Internet about abolishing the Fed and reinstating the gold standard. I find that in general, whenever a group on the Internet are alarmed, the panic is overblown or misdirected. I have some OCD hangups about this. Here goes.

First of all, when the Fed prints money, it does make itself richer at the expense of people who hold the currency. That’s called seigniorage, if you’d like a cocktail party word for it, and it results in inflation. A gold standard replaces this fiat money with money that is backed by a certain weight in gold. Because this weight is constant, it eliminates inflation. However, this can have undesirable side effects, and there are very good arguments against reinstating a gold standard.

In a gold standard, the supply of currency is dependent on gold mining, meaning the supply is not controlled. This can result in a currency shortage, deflation, which makes it worthwhile to hoard currency. Milton Friedman argued that this overrestriction of currency was part of the cause of the Great Depression; Ben Bernanke, the current Fed chair, wrote his thesis on that.

The Fed is an strange institution, run by economic technocrats that are insulated from government influence. This makes them seem both shadowy and unaccountable; however, this intentionally insulates them from the rest of government, where election cycles drive a desire to pump money into the economy. (It’s quite an ideological irony that the modern free market economy is dependent on the good intentions of a few economic professors.) Greenspan, the former Fed chair, was known for being nostalgic for the gold standard:

Greenspan famously argued the case for returning to a gold standard in his 1966 paper “Gold and Economic Freedom“, in which he described supporters of fiat currencies as “welfare statists” hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.

A fiat currency is far more flexible than a gold backed one in dealing with cyclical recessions (which did, by the way, occur when the gold standard existed as well). Anyone who argues that the Fed can’t hold down currency is not familiar with Fed history; anyone who thinks the a more accountable government institution would necessarily do any better should be careful.

—

Second of all, if you love the gold standard and Fed-free currency so much, is it best to go through the government? Private currencies do in fact exist, though their legal status is questionable–perhaps something should be done about that. An official gold standard still involves trusting the feds not to abuse it, as they have done in the past. The fact is, governments always abuse, or are prone to abuse, currency, gold and otherwise; if you really want to avoid this sort of inflationary pressure, then it is necessary to make a responsible government institution, use a non governmental currency, or use a mechanical currency.

—-

The Fed depends on the ability of economists to manage the money supply in a prudent manner; inflation, when it comes, is an indication (though not necessarily proof) of irresponsibility. There are plenty of objections to such a system, as political as they are economic. But the solutions will not come from tying our money supply to the vagaries of mining a metal that comes out of the ground, or pretending government isn’t run by human beings.

If your government doesn’t have monetary-policy credibility, attempting to establish that credibility by going on the Gold Standard is a recipe for disaster. If your government does have monetary-policy credibility, going on the Gold Standard doesn’t gain you anything…

0 comments.