National Review editor Ramesh Ponnuru doesn’t like the gold standard. Below is my critique:
“Consider, for example, a world in which the Federal Reserve conducts monetary policy so that the price level rises steadily at 2 percent a year. Savers, knowing this, will demand a higher interest rate to compensate them for the lost value of their money. If the Fed generates more inflation than they expected, as it did in the 1970s, then savers will suffer and borrowers benefit. If it undershoots expectations, as it has over the last few years, the reverse will happen. The anti-saver redistribution Paul decries is thus not a consequence of monetary expansion per se, but a consequence of an unpredictedly large expansion . . . Nor is the wage earner necessarily defrauded.”
Inflation, money supply expansion, does not mean all prices rise uniformly. The people who first use the money, reap the benefits of it before prices rise in response to its circulation. It does defraud later money users. Whether the amount is great or small is irrelevant.
“That’s why central banking isn’t central planning: It never attempts to fix the relative prices or quantities of all the goods an economy produces, and it cannot cause the total amount of goods an economy produces to hit any particular target.”
This depends on the definition of central planning. Just messing with the interest rate can cause the business cycle. That does enough damage to the economy.
“Paul’s contention that the Fed has continuously abetted the expansion of the state — its wars, its welfare, its attacks on civil liberties — is also false. The federal government uses its monopoly over the currency to finance very little of its spending. It gets almost all of its money through taxing and borrowing, and the borrowed funds come from people who are well aware of the need to charge a premium to cover the risks of inflation.”
While this is true for about the past decade, it is not true of the Fed’s whole existence. For example, money printing paid for World War I and prices skyrocketed. The Fed created the 1929 stock market bubble. It also abetted the 1970s stagflation. There are likely other instances, but the point is to give some examples, not a complete history.
“If industrial demand for gold rises anywhere in the world, the real price of gold must rise — which means that the price of everything else must drop if it is measured in terms of gold.”
If money is limited by gold supply and some industries are able and willing (demand’s definition) to pay for the gold, the gold-backed money holders choose whether to trade their gold for payment in . . . what? Silver? Paper? The global financial system is riddled with malinvestments due to governments. If only the U.S. had sound money, but the rest of the world persisted in its devaluing fiat money, I doubt the gold holders would trade their commodity for questionable paper. I don’t want to hypothesize about if the gold holders traded with an industry that also used gold-backed money or fiat money or silver-backed money or the many other possibilities. The point is that all prices do not necessarily drop in the economy because some people want to buy gold. So what if gold became more valuable? That means increasing purchasing power which is what happened in the U.S. in the past when gold was used.
“Because workers resist wage cuts, this kind of deflation is typically accompanied by a spike in unemployment and a drop in output: in other words, by a recession or depression.”
Prices are flexible. If the choice is wage cut or unemployment, workers are likely to opt for the cut unless they have better job opportunities in which case there ain’t gonna be a recession. All prices are flexible. Just keep saying that until it is drilled into your mind. Products not selling? Lower the price. Too expensive to hire? Take a lower wage. The economic system will adjust to sustainability, but start meddling with it via the interest rate (the Fed) or with wage and price controls (the congress and president), and the result is dysfunction.
“If another country’s government begins hoarding gold, the same thing happens. This is not a theoretical concern: It’s what France did in the early years of the Great Depression. Countries were forced off the gold standard, and recovered in the order they left it.”
So France horded gold because it was actually worth something? Good. So then they all used paper money and the Government Depression continued. Prices weren’t allowed to adjust. The limits on government spending were removed by governments that screwed over peoples rights to their gold-backed money. Congratulations: immorality and bad economics wrapped together.
Thoughts on my analysis?