You have publicly gone on record with some
off-the-wall assertions about the gold standard. What made you think you
could get away with it? Your best strategy would have been to ignore
gold. Although I concede that with the endgame of the regime of irredeemable
paper money near, you might not be able to pretend that people aren’t talking
and thinking about gold. You can’t win, Ben. In this letter I will
address your claims and explain your errors so that the whole world can see
them, even if you cannot.
Before I get into your specious claims, I want to point out two of important facts. First, the gold standard exists when people are free to choose what they wish to use for money. Gold has won this market competition over thousands of years, but the key is that when people are not forced to use government-issued scrip they choose gold. And that’s the shabby little secret of your irredeemable paper money, Ben. You have legal tender laws to force creditors to accept it, whether they would or not. Will you please let people be free?
Second, central planning does not
work. The Politburo in the since-collapsed Soviet Union did not know how
many shoes to make of what sizes. And you don’t know what rate of
interest to set. Central planning has always led to the collapse of the
specialization of labor and the economy with it, to the degree that it is
attempted. The Federal Reserve, the central bank of the USA, is the
central planner for money, credit, interest, and discount. Given the
importance of money to every single aspect of the economy, it is no
exaggeration to say that there is no such thing as a free market built on top
of a centrally planned monetary system.
In your speech at George Washington
University, you made the following claims:
1. The gold standard hasn't really worked since the end of WWI.
2. To have a gold standard, you have to go
dig up gold in South Africa and put it in a basement in New York. It's
nonsensical.
3. The gold standard links the currencies
of every country, causing policy in one country to transmit to another.
So for example, if the U.K. fixes the number of pounds to an ounce of gold, and
the U.S. fixes the number of dollars to an ounce of gold, then the pound and
the U.S. dollar inadvertently become linked.
4. It creates deflation, as William
Jennings Bryan noted. The meaning of the "cross of gold"
speech: Because farmers had debts fixed in gold, loss of pricing power in
commodities killed them.
5. The gold standard tends to cause
interest rates to rise during downturns and interest rates to fall during good
times, the exact opposite of what monetary policy should be doing.
6. The economy was far more volatile under
the gold standard.
7. The only way the gold standard works is
if people are convinced that the central bank ONLY cares about maintaining the
gold standard. The moment there's a hint of another priority (like
falling unemployment) it all falls apart.
8. Gold standards leave central banks open
to speculative runs, since they usually don't hold all the gold.
9. The gold standard is based on the
"desire to maintain the value of the dollar"—implying a "desire
to have very low price stability.”
10.
The gold standard is based on an aversion to allowing the central bank to
respond with monetary policy to booms and busts, and a desire not to give the
central bank that power.
11.
There's simply not “enough” gold
12.
The commitment to the gold standard is that no matter how bad the economy gets,
we're going to stick to the gold standard.
13. The gold standard was one of the main
reasons the Great Depression was so bad and so long.
Please forgive me if my take down runs a
little bit long. I’ve found that it is much easier to commit a logical
fallacy in a sound bite than it is to explain the full context. I will
take your assertions in order.
1. The gold standard hasn't really worked
since the end of WWI.
This is true. Just prior to Christmas
in 1913 (which is before the beginning of the war, by the way) the Federal
Reserve Act was passed into law. Ever since, the Fed has taken for itself
and been granted more and more power to try to centrally plan money and
credit. You and your predecessors have been in power for a century, but
this fact is in no way an argument against the gold standard.
2. To have a gold standard, you have to go
dig up gold in South Africa and put it in a basement in New York. It's
nonsensical.
The fact is that for thousands of years,
people have been digging gold up and putting it in basements. To call the
behavior of so many people over so many years “nonsense” is arrogant. A
free country has room for arrogant men, but no place for arrogant men to back
their whims with a gun. From 1933 until 1975, one could be imprisoned for
the “crime” of possessing gold. To this day, it is not legal for a
creditor to demand payment in gold. If you are so confident that you are
right and all good men should be happy that you print dollars at your discretion,
can we agree on an experiment? Let’s repeal the laws that force creditors
to accept paper, and the laws that nullify gold clauses in contracts, and the
taxes on the “gains” in gold, and the laws that force taxpayers to use dollars
as their unit of account for bookkeeping purposes, and see what people choose
when the gun is not compelling them. I will wager one ounce of good gold
against a frayed old dollar bill that people will choose gold if you let
them. Should I book my flight to Washington to pinky-shake on our bet?
3. The gold standard links the currencies
of every country, causing policy in one country to transmit to another.
So for example, if the U.K. fixes the number of pounds to an ounce of gold, and
the U.S. fixes the number of dollars to an ounce of gold, then the pound and
the U.S. dollar inadvertently become linked.
Actually, Ben, you are describing the gold
exchange standard that prevailed from the insane treaty at Bretton Woods until
it collapsed in 1971 with Nixon’s default. The choice is not between
price fixing vs. excluding gold altogether. The choice is between the freedom
for people to choose gold vs. your smart and efficient central planning.
4. It creates deflation, as William
Jennings Bryan noted. The meaning of the "cross of gold"
speech: Because farmers had debts fixed in gold, loss of pricing power in
commodities killed them.
By the way, Ben, the Coinage Act of 1792
fixed the price of silver in terms of gold at (15:1). Like every instance
of laws that attempt to interfere with the markets, this provision was an
unmitigated disaster. Whichever metal is officially valued at less than
its market value will be pulled out of circulation and sent elsewhere for its
market price. Whichever metal is overvalued will be imported from every
corner of the earth and come flooding into the country.
In 1873, the government was ready to open
the US Mint again. But when they wrote the list of which coins the Mint
was authorized to coin, they somehow “forgot” to include the one ounce silver
coin. Silver was demonetized. I am sure it had nothing to do with
lust for power by the good men who ran the government, nor with any lobbying
that might have occurred around that time. This was dubbed the “Crime of
‘73”.
Demonetizing silver destroyed enormous
amounts of capital, Ben. Just imagine that a farmer, to use your example,
has been working hard and saving all his life. And then the government, in
callous and cavalier fashion, passes a law that destroys the value of his
savings. But this is the power you crave, isn’t it? This is the
power of central planning, to sit in an office in Washington, taking into
account your whims, pet theories, and the desires of lobbyists and casually
dispose of the income and wealth of the people without their consent.
5. The gold standard tends to cause
interest rates to rise during downturns and interest rates to fall during good
times, the exact opposite of what monetary policy should be doing.
You have pushed interest rates down to zero
on the short end. This has achieved nothing good, and yet you are
unwilling to consider that, just maybe, your pet theory is wrong? Good
thing your pet theory is enforced on the rest of us at gunpoint, eh Ben?
We should pause for a moment to reflect on
the nature of downturns. The original promise of the central bank was
that it would prevent downturns! As recently as the “Great Moderation”
which abruptly ended in 2001, this myth was widely believed. But we see
that downturns are not prevented by the central bank. Instead, much
larger downturns (such as the one which began in 2008) are caused by the
central bank.
Let us look at the nature of these
downturns. For a while, the bank encourages credit expansion by various
means. The bond speculators (which did not exist under the gold standard)
jump onto the bandwagon and the result is that interest rates have fallen for
more than 30 years in a row.
During this long period, as you can
imagine, much counterfeit credit is created. By counterfeit credit, I
mean where either the saver is unwilling to lend or even unknowing (such as
anyone who deposits in a bank nowadays) or when the borrower lacks either the
means or intent to repay (such as the government, or many bond issuers and
banks). Sooner or later, the game is up. The borrower can no longer
keep current on the interest payments. Not even by “rolling” the
debt. As an aside, Ben, this is another dirty secret of the irredeemable
currency: there is no way for any debt, ever, to be repaid; it only moves from
one debtor to another and ultimately ends up at the Fed or the Treasury.
So what you blithely call a “downturn” is
the painful process of writing off bad loans. Capital has been destroyed,
and everyone who made bad loans must write it off. You are correct that
interest rates should rise as a result! Capital is far more scarce than
people believed during the boom.
6. The economy was far more volatile under
the gold standard.
I don’t think even you believe this, so I
will not comment further except to note that the 1929 crash occurred under the
tender ministrations and brilliant central planning of the Fed.
7. The only way the gold standard works is
if people are convinced that the central bank ONLY cares about maintaining the
gold standard. The moment there's a hint of another priority (like
falling unemployment) it all falls apart.
8. Gold standards leave central banks open
to speculative runs, since they usually don't hold all the gold.
No, Ben. I will address these points
together: a gold standard is when there is no central bank. What you are
substituting in your confusion is if the Fed were to somehow try to centrally
plan gold. But you know that doesn’t work, so I need not spend time
arguing against it.
Speaking of unemployment, as you know, if
the portion of the population who is deemed to be “in the workforce” hadn’t been
shrinking so much, the unemployment rate right now would be just below
“staggering.” And this is despite (or perhaps because of) your central
planning activities.
9. The gold standard is based on the
"desire to maintain the value of the dollar"—implying a "desire
to have very low price stability.”
The gold standard is about many
things. Speaking of the value of the dollar, you are aware, I am sure,
that it has lost about 98% of its value in the 100 years since your
organization began centrally planning. Under gold, prices do not remain
constant. That kind of stasis is neither possible nor desirable.
Prices, and more importantly changes in prices, signal to consumers and
entrepreneurs what is scarce and what is in demand. No, what remains
stable is the rate of interest. And it is this rate that is manifestly
unstable under the Fed’s careful designs. As recently as 30 years ago,
the rate on the 10-year US Treasury was almost 16%. Today it is 2.2%,
having recently hit a low under 1.8% (and this rise of more than 22% in a short
period of time is both staggering and revealing).
Changes in the rate of interest cause
enormous destruction to industry. A rising rate destroys businesses one
by one as each looks at financing new capital projects, or replacement for worn
plant. But at each higher interest rate, fewer and fewer capital projects
make any sense. So factories shut down, and ever more workers join the
unemployment line. Does this strike a note, Ben?
Falling interest rates cause a more pernicious
and subtle damage. Bond speculators make risk-free gains on their
bonds. This money does not come out of thin air, however. Each bond
issuer now has a higher present value of their liabilities. Good thing
that FASB does not require them to mark liabilities to market when the bond
price rises, or else there would be a serious problem! Actually, there is
a serious problem even if we all close our eyes and pretend otherwise. Is
that a fair characterization, Ben: that the purpose of the Fed is to help
everyone play make-believe?
Under paper, neither prices nor interest
rates have been stable. Have you taken a look at the chart for crude oil
or most other commodities, Ben?
10. The gold standard is based on an
aversion to allowing the central bank to respond with monetary policy to booms
and busts, and a desire not to give the central bank that power.
Here you are correct, Ben. You should
not have that power. No one should have that power. A brilliant
author by the name of JRR Tolkien wrote a story about power. Have you
ever read The Lord of the Rings or seen the version Peter Jackson
made into film?
11. There's simply not “enough” gold
How much gold do you think there is,
Ben? How much gold do you think a gold standard would need? You
don’t know either number, of course. This is just an old wives’
tale. Do you also wear copper bracelets to ward off the common cold, or
is that vampires (I forget)?
12. The commitment to the gold standard is
that no matter how bad the economy gets, we're going to stick to the gold
standard.
This is an interesting logical fallacy. You
are lumping together commitment to gold with bad economy. This called
“begging the question”. You are presuming what you ought to be asking.
13. The gold standard was one of the main
reasons the Great Depression was so bad and so long.
So you think that the disastrous adventure
that combined both taxes and protectionism that led to a trade war and thence
to collapsing trade had nothing to do with it? Or FDR’s constant threats
to change the rules of the game, thus rendering investments previously made
worthless (there’s that problem again)? What about the various other central
planning interventions of both Hoover and the New Deal?
Or how about the falling interest rate
structure that I mentioned above? When the government outlawed the
ownership of gold, that herded people into the next-best choice: US
Treasuries. This caused the interest rate to fall. Have you ever
stopped to think what this does to savers, such as the small farmer for whom
you weep crocodile tears?
Ben, I am convinced that the regime of irredeemable paper
money and hence the Fed is going to come to a sudden and catastrophic
end. One way or the other, your power and the power of the Fed will be
ended. I would prefer that it be ended without also ending western
civilization, which is the course we’re headed on right now. You remember
that bit earlier about capital being rare and precious? Your policies are
helping accelerate an unprecedented destruction of capital. When the
capital is gone (if not sooner) the game will be up.
I would like to avoid plunging into a new
Dark Age. Can we agree at least on this, Ben?
Sincerely,
Keith Weiner
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