Paul Krugman: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse.

Originally posted on Thursday, January 2nd, 2014

New York Times columnist Paul Krugman again turns his attention, again, in Bits and Barbarism, to the gold standard (and Bitcoin).

Photo courtesy of Wikipedia

He concludes: “What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse” — meaning, of course, the gold standard.  Krugman appears unaware — or perhaps is tactically ignoring — the real arguments by the proponents of the classical gold standard (which do not include a plan to phase out currency and replace it in general circulation with gold coins).

Prof. Krugman deserves credit for his grasp that “What’s really happening” is a serious movement toward restoring the classical gold standard.  Still, he misrepresents (or is simply unaware of) the proponents as anticipating hyperinflation.  Prof. Krugman:

Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.

Yes, there is a constituency who believes, and has long predicted without effect, in hyperinflation.  These do not include figures such as Lewis E. Lehrman, founder and chairman of the Lehrman Institute; James Grant; Prof. Lawrence White, and many other gold standard proponents and sympathizers.  Prof. Krugman also subtly misrepresents Adam Smith’s views:

I suspect, however, that Adam Smith would have been dismayed.

Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold.

Smith did not argue for scrip (paper money unrelated to gold) but for fractional reserves — a doctrine which all of the modern proponents of the classical gold standard (unlike a minority of Austrian economists) take as an idea well proven in the laboratory of history.  Smith, in Wealth of Nations, called for a 20% fractional reserve of currency to precious metals.  Wealth of Nations, Book II Chapter II:

When, therefore, by the substitution of paper, the gold and silver necessary for circulation is reduced to, perhaps, a fifth part of the former quantity, if the value of only the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry, it must make a very considerable addition to the quantity of that industry, and, consequently, to the value of the annual produce of land and labour.

Prof. Krugman is free to speculate that Smith would have been dismayed at the restoration of the classical gold standard in effect in Smith’s day.  Yet to speculate that Adam Smith, a meticulous observer and analyst, would consider a zero percent fractional reserve — as we have had since 1971 with the Federal Reserve Note standard — would be superior to a 20% fractional reserve is speculating far and indefensibly beyond the data.