Originally posted on Tuesday, November 5th, 2013
Slate, the online magazine, recently published a more than ordinarily thoughtful piece by gold standard skeptic Matthew Yglesias entitled Cato Institute Staging Gold Standard Love-In.
Matthew Yglesias courtesy of Wikipedia
Yglesias:
Given the past five years of unusually low inflation and unusually low employment relative to the size of the population, the only sensible question to ask about monetary policy is whether the Federal Reserve has done enough to support aggregate demand and economic growth. Instead, the libertarian Cato Institute is sending out invitations to a November conference dedicated to talking about the gold standard:
CATO’S 31ST ANNUAL MONETARY CONFERENCE — WAS THE FED A GOOD IDEA? — will bring together some of the world’s leading scholars and policymakers to consider the record of the Federal Reserve since its establishment in December 1913. The Great Depression left a black mark on the nation’s central bank and the Great Recession has vastly expanded the bank’s powers. In 1913, the dollar was defined in terms of gold. Today we have a pure fiat money and the Fed is the largest buyer of U.S. public debt, enabling the federal government to live beyond its means. Would we have been better off adhering to the rules of a gold standard? This conference will address that issue by examining the regulatory record of the Fed, discussing the constitutional basis for adhering to a convertibility principle, and by making the case for a National Monetary Commission to consider alternatives to the current regime.
Yglesias concludes that there is:
“a deep yearning to give the case for free markets a profound moral reading rather than a pragmatic one, and that reading is hard to maintain in the face of a modern monetary system. Hence the hankering for gold.”
This, by dismissing the pragmatic arguments for the gold standard — which Yglesias does not, in fact, grapple with — is a too-facile critique. Yet there are signs that Yglesias, one of the smarter (magna cum laude, Harvard University, 2003), and more decent, cats in the Neo-Keynesian alley, has, perhaps for the first time, begun engaging thoughtfully with the proponents of gold. [One hopes that the unfortunate inclusion of the neologism “derp” in the article’s URL was interposed by an editor; use of the term “derp” would be the mark of an infantile twerp.]
Two years ago, Yglesias indulged in an much more facile dismissal of gold. At ThinkProgress.org, the propaganda arm of the Vast Left Wing Conspiracy, he wrote The Trouble With Gold:
Interestingly, what won’t give you the security you crave is the adoption of a gold standard. If a federal law mandates that $1,000 be worth a certain amount of gold, there’s nothing stopping congress from changing the law later. If you want the alleged security of gold, there’s no substitute for gold. A gold standard is neither necessary nor sufficient.
Nor does gold ensure stable prices. What it ensures is that inflation trends are driven by the supply of gold. Find a new gold mine somewhere: inflation. Aliens come to steal gold: deflation. All you’re doing is randomizing the extent and timing of inflation.
“Aliens come to steal gold?” This clearly was not grappling with the data (or real world).
Now, as Slate‘s business and economics correspondent, Yglesias presents a somewhat more mature perspective, one in which he presents as groping to understand the grounding of the libertarian (although not the classical liberal conservative) narrative in support of the gold standard. Yglesias’s future critiques will be far more interesting, and useful, once he moves beyond a superficial reading of the arguments of the gold standard’s proponents. These are not, predominantly, rooted in inflationphobia, here imputed, groundlessly, to Cato’s scholars.
The gold standard is not solely based in a “profound moral reading” to the exclusion of a pragmatic one. Moreover, the classical gold standard leans neither right nor left, not authoritarian nor libertarian. Left wing icons — Karl Marx, for one, and George Bernard Shaw, for another — were gold standard proponents. Keynes, for another (although soon thereafter abjuring the gold standard — or at least its “evil twin” the gold-exchange standard) wrote, in 1922:
“If gold standards could be introduced throughout Europe, we all agree that this would promote, as nothing else can, the revival not only of trade and production, but of international credit and the movement of capital to where it is needed most. One of the greatest elements of uncertainty would be lifted…and one of the most subtle temptations to improvident national finance would be removed; for if a national currency had once been stabilized on gold basis, it would be harder (because so much more openly disgraceful) for a Finance Minister so to act as to destroy this gold basis.”
The left potentially has a very constructive, potentially crucial, role in the coming debate about the restoration of the classical gold standard. The restoration must set a conversion parity at which the value of the dollar is defined. This is an important matter.
As indicated in The True Gold Standard by Lehrman Institute founder and chairman, Lewis E. Lehrman — who will be presenting the Closing Address at the very Cato monetary conference skeptically, and unduly superficially, questioned by Yglesias — this will be determined, initially, by a price discovery period. But Lehrman also has called for a step to ensure that labor and debtors cannot be prejudiced in the process.
The higher the parity, the more it privileges capital and creditors. The lower the parity, the more it privileges labor and debtors. Lehrman has been virtually alone in calling for a mechanism as added insurance that labor and debtors are not prejudiced in the process of setting the new price parity (as happened, for example, in 1925).
Yglesias — if he begins to focus on the actual, rather than posited, propositions of the key classical liberal gold standard proponents, like Lehrman — would add a most welcome contribution to the discourse. The major classical liberal proponents propose the gold standard — with much empirical data to support the argument — as a mechanism to restore a climate of equitable prosperity for labor and the middle class.
This very much includes reducing the income inequality that began to become pandemic when President Nixon, on August 15, 1971, repudiated the last vestiges of the gold standard. The perspective of the left on the real presenting issues of restoration would be welcome.
The perspective of honest liberals, in fact, would be invaluable.
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