A Stitch in Haste

The New York Times Magazine has a fluff piece today on gold bugs, who — unsurprisingly — have an embarrassing tendency to be libertarians:

Representative Ron Paul, a Republican from Texas who is gold's lonely advocate in Congress, put it to me this way: "We will go back to the gold standard, even if it takes the near-destruction of the dollar to get there."
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The Daily Reckoning is a freewheeling Web site for libertarians, gold bugs and doom enthusiasts of every stripe. Its editorial director is Addison Wiggin, and before we met, I pictured an "Addison Wiggin" as an ancient gold-hoarding Yankee, and the offices of The Daily Reckoning as a cinder-block bunker patrolled by Minutemen. I was wrong on both counts. Wiggin is a sober, black-clad 37-year-old who is active in libertarian circles.

One of the (several) ways that I fall short of being a radical libertarian is my impatience with gold bugs. The gold standard is an anachronism at best and tin-foil hat paranoia at worst.

Here's a synopsis of the gold standard I wrote a while back:

All the gold ever mined, whether used for bullion, jewelry, spacecraft or tooth fillings, would, if formed into a cube, fit within the dimensions of a baseball diamond. Does anyone honestly believe that the entire global economy and financial system, or even the American economy and financial system, could be anchored to that? And bimetallism ("we use silver for smaller transactions") is impossible in a free economy because of Gresham's Law.

There is nothing wrong with a modern, free economy using a fiat money system so long as the "fiats" are reasonable and obeyed. Specifically, so long as the central bank (e.g., the Federal Reserve) keeps the money supply stable (i.e., slow, steady, publicly-announced increases that match the rate of economic growth), without any attempt to monetize debt, and also allows freely floating exchange rates (e.g., no intervention to "shore up" a weak dollar), then the functions of money (store of wealth, unit of currency, medium of exchange, etc.) are preserved.

Some more thoughts:

--Throughout history, every nation or empire that fixated on gold for gold's sake collapsed in the process. The best example is of course the Spanish empire of King Philip in the Sixteenth Century. If you expend productive resources merely for the acquisition of a nonproductive resource (such as gold), the results are obvious, predictable and inevitable.

--How libertarians can in the same breath praise the gold standard while saying bedtime prayers to Saint Adam Smith is also inexplicable: the whole thesis of The Wealth of Nations was to demonstrate that mercantilism (i.e., the acquisition of inert wealth) was inferior to global trade (i.e., the exploitation of productive wealth) — "It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased..." Anyone who would, all else equal, rather own a gold coin than a share of stock is not a capitalist, and therefore cannot be a libertarian.

--"But Kip, it's not about us, it's about government — they abuse fiat money but they can't abuse gold!" As Michael said to Kay: "Who's being naive?" Wouldn't it make more sense to restrict the power of government, whether Congress, Treasury or the Fed, to abuse the fractional reserve banking system than to call for retrogressing to an archaic and unworkably primitive gold standard (which the politicians and bureaucrats would manipulate anyway)?

--By the same token, the price of gold, um, fluctuates. Or if you prefer, the dollar fluctuates against gold (the choice of numeraire is totally irrelevant). Which begs the question: What's so preferable about the dollar fluctuating against gold rather than against the euro, pound, yen or Swiss franc?

--Gold grew to become the first civilized currency for a variety of reasons, one of which was actually its relative uselessness (other than for jewelry). Stated differently, gold is essentially also "fiat money" the same way Federal Reserve Notes are fiat money. The only reason gold has any value at all is because people say it does. If tomorrow some kind of space-age alchemy made gold production costless, then it would quickly become as worthless as paper money with the printing presses working overtime.

--Related to the previous comment, one more quote from the Times Magazine piece:

There he picked up two coins and placed one into each of my hands. They were "Saint-Gaudens," named after the great American sculptor who designed them for Teddy Roosevelt. They had a face value of $20 and a value based on the amount of gold they contain — probably a few hundred dollars. But the ornate coins were impossible to stack, and had been discontinued after a short run. On the open market now, thanks to their rarity, the coins together might fetch $800,000.

So much for the "objective," unmanipulable value of gold as a currency.

Other thoughts, not consistent with mine, at LewRockwell.com and Mises Economics Blog.

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