According to a
recent report, President Trump is in favor of returning to “the gold
standard.” We haven’t verified the
quote, but he allegedly said, “Bringing
back the gold standard would be very hard to do, but, boy, would it be
wonderful. We’d have a standard on which to base our money.” The report went on to say that few
economists were in favor of such a move.
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| United States Double Eagle ($20) |
It would, of course, have
been more accurate for the report to say that few economists to whom the media pay any attention were
in favor of such a move. Many Austrian
and some Chicago-Monetarist economists think that a return to the gold standard
is exactly what the country and the world need.
The problem with a return to
the gold standard is that it is just right enough to be exactly the wrong
thing.
Obviously, we can’t just make
a paradoxical statement like that and leave it there. We have to explain what we mean.
First and foremost, it is
clear that the monetary system in place throughout much of the world cannot
continue for very much longer. There is
not a single major currency that is not backed entirely or predominantly with
the debt of the government that issues it.
The colossal load of government debt throughout the world is not something
that could easily be repaid even under the best of conditions, and current
conditions are such that the debt burden will only increase.
The current policy of most
governments is, to put it bluntly, monetary and fiscal insanity. It is a near universal implementation of a
couple of fundamental contradictions at the heart of the Keynesian theory of
money: that “money” is whatever the government says it is, and it represents a
non-repayable debt the nation owes itself.
That being the case (the
theory goes), it doesn’t matter how much money a government issues, for it’s
just taking out of one pocket and putting it in another. All debt the government issues is merely a
promise to pay itself, what accountants call a “wash entry.”
This is absolute nonsense,
regardless how many people got their Ph.D.s in it, or garnered who knows how
many awards and prizes for telling politicians exactly what the politicians
wanted to hear: that they could spend, spend, spend, and never have to pay the
piper. It results from confusing actual
people with the abstraction “the People,” and at the same time mixing up “the
People” with the government, and the government with the State.
Thus, most people see nothing
wrong with a government making promises to pay, backed by the government’s own
promises to pay, that the government then declares it doesn’t have to pay! After all, this is “MMT” — “Modern Monetary
Theory” — the theory on which virtually every government and central bank in
the world operates.
You say that doesn’t make
sense? But that’s exactly what it means
to back the currency (a promise to pay) with government debt (a promise to pay)
that the government (and the economists) say is a promise that the government
doesn’t have to keep, i.e., a
“non-repayable debt the nation owes itself.”
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| "Don't look at me. I just told them what to do. They did it." |
How did the world ever get
into such a mess and mass of contradictions?
It would be easy just to
blame Keynes and the Academics. After
all, it was their theories that justified this kind of currency craziness.
But who was it that listened
to Keynes and the Academics?
The politicians.
And why?
So they could spend money
without being directly accountable to the taxpayer. They would thereby greatly increase their
chances of being reelected, and be able to increase their power while in office.
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| Dr. Harold G. Moulton |
At least, that is
what Dr. Harold G. Moulton, president of the Brookings Institution from 1928 to
1952 implied in his analysis of Keynes’s New Deal programs during the Great
Depression of the 1930s. He found that
the chief reason governments abandoned the gold standard from the late 1920s
onward was to gain control of the currency so as to be able to manipulate the
value of the currency for political ends.
After abandoning
the fixed standard imposed by tying the currency to gold, a government could
create all the money it wanted and back it with its own debt, and not have to
worry about whether it was more or less than the market price of gold. If the government wanted money without
taxing, it could raise it much more easily.
In the United States, Keynes’s theories replaced the “elastic”
asset-backed currency that had a fixed value in terms of gold, with a
debt-backed currency that was elastic (after a fashion) that did not have a
fixed value in terms of gold for users of the currency, only for other governments.
It also changed
the meaning of “elastic currency.”
Formerly an “elastic currency” meant that the amount of money in the
economy increased or decreased directly with the needs of private sector
agriculture, commerce, and industry. Now it meant that the amount of money in
the economy increased or (try not to laugh) decreased directly with the needs
of government . . . just as the
socialist Georg Friedrich Knapp recommended in his “State Theory of Money”
that, under the name of “chartalism,” Keynes used as the basis of his theory of
money.
Consequently, with
a flexible monetary standard and an elastic government debt-backed currency (instead of a fixed
standard and an elastic private sector asset-backed currency), if politicians wanted to encourage exports,
they could make the domestic currency cheaper in terms of other countries. They would make up the difference by
inflating prices domestically, artificially making foreign goods more expensive
than domestic goods to take up the slack.
To encourage imports, they would do just the opposite. For a combination of encouraging some exports
and some imports, and discouraging others, they would add subsidies or tack on tariffs
to adjust the buying power of the currency up or down for a particular item, as
desired.
Of course, this
made other countries angry, even if they were doing the same thing . . . or especially if they were doing the same
thing. One of the reasons Japan declared
war on the United States in World War II was because they felt the U.S.’s
unfair trade advantage was undercutting their
unfair trade advantage in Asia and the Pacific.
You can’t have a flexible
standard (an oxymoron, by the way) for the currency and expect to have a stable society for very
long. After all, Sam who pays Fred a
dollar for a pound of bread is going to be very irritated with Fred who uses a
different standard for “pound” that equals only four of Sam’s ounces. By Sam’s lights, Fred just cheated him out of
75¢. And you wonder why countries go to
war over such things?
So, if we take
President Trump’s comment at face value, it’s not a bad idea. Part of a government’s job is to define the
value of the currency, the same as it would specify the standard of other
weights and measures.
Tomorrow we’ll
look at why, although having a fixed standard (redundant, by the way) for the currency is a very
good thing, gold might not be the best standard.
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