Most of us like
shiny objects, so of course people like gold. If there is such a
thing as a gold standard, then why would we not love it? This should be
simple.
Apparently, in the same vein, President Trump and this new potential appointee at the Fed have exhibited a love for the gold standard. This
shiny object seems to have affected even the dullest bulbs in the basket.
Let’s start
with some history. The world was on a gold standard back when Nancy Pelosi was
just a tiny thing and ended around 1919. Yes, it ended 100 years ago. What else
that ended 100 years ago that would you like to return to? Wooden buggies?
Muddy streets? World War I?
Anyway, history
suggests that people decided NOT to be on the gold standard. It once was, but
then it ended.
Like shiny
objects that get lost and show up again, after World War II, some really smart
people decided we should try the gold standard again but this time they gave it
a new name – the Gold Exchange Standard. The new name and perhaps a slightly
different arrangement made people who met at a nice place called Bretton Woods
think that this gold standard was going to be the be-all to end-all gold
standards. It would be better than sliced bread or Elton John.
Somehow, by 1971, the world decided the Gold Exchange Standard sucked dirty water and abandoned
that one, too. Keep in mind that President Trump and some of his genius advisors
want to return to something that has failed at least twice. Maybe they haven’t
heard that saying about three times a loser. Of course, maybe they are just
going for another shiny object? Hi Donald, should we have a gold standard? Of
course, look at how it sparkles.
What is a
gold standard, and why do people want a gold standard? And why do they seem to
fail? Lots of cool questions, eh?
A gold
standard is essentially a means to control the money supply. A gold standard
says that a country cannot print more money unless they "dig up" a bunch of gold.
Since it is not easy to get gold, that makes it harder for a country to print
too much money.
We know that too much money is like 12 chili dogs at the Corner
Bar and your son throwing up. Too much money can be very bad for the economy. A gold standard is good since it removes the worry that silly central bankers will
print money like chili dogs.
Despite a
nicely functioning Gold Exchange Standard, the Fed, our beloved Central Bank, found
ways to circumvent the rules and printed so much money that they destroyed that
Gold Standard right around the time Richard Nixon was breaking into offices and thinking up one of the stupidest programs ever called the Nixon Wage and Price Controls.
I think I
answered the above three questions, so what remains is to answer why people want
to put us through all this madness again. Sure, it sounds good to have a gold
standard. I’d love to find a way to make the Fed manage our money supply
responsibly.
Check out the data now and you will find that the Fed has created
enough money since the last recession to fill Bezo’s swimming pool. The problem
with wishing for such a system is that the past shows that no matter what
system you put in, central banks and governments find ways to cheat and destroy
the system. Why would now be any better?
And the real
laughable part of this is that Trump is the guy who keeps putting pressure on
the Fed to lower rates and increase the
money supply. How is it possible that he wants all that money AND a gold
standard? I think it all goes back to shiny objects. There is no logic that
could explain him wanting things that don’t go together. It would be like him wanting
to put Sonny and Cher (or Ike and Tina Turner) back together. Ain’t gonna happen.
I think we
have had enough gold standards. Let’s try doing one thing. Tell the Fed to
take out all the extra money and then increase the money supply each year by a
smidge. Its not hard. No Gold Standard please.
The amount that the money supply grows each year should be in line with Real GDP growth so that there is not too little money to buy the goods and services produced nor too much that an increase in the money supply greater than the increase in the amount of real goods and services leads to inflation. During the 1890s when we were on a gold standard, real GDP was growing like crazy but the amount of gold and money in the economy was not. Hence prices were falling. Debtors found that the amount they sold their goods for was not enough to give them relief from their debt. When Williams Jennings Bryant gave his Cross of Gold speech at the 1898 democratic convention in Chicago he was begging to get off the gold standard so that we would not be crucified by this cross of gold of unrelenting deflation. Discovery of gold in the Klondike led to a temporary increase in the amount of money in the economy so that the deflation abated. As dangerous as it may seem to have 7 people decide how much money there is in the economy, that seems better than hoping for another Klondike gold rush although it did give us some great Jack London stories. This economic series of events led to the foundation of the Federal Reserve in 1913. Sorry to take so long to say, I agree with Uncle Lar'.
ReplyDeleteJero,
DeleteThanks for filling in some of the missing history. Having a fed with discretionary powers beats a gold standard. But sadly when you have idiots running the Fed, its not much better. But it is definitely better to have a second-best solution than to have a first worst. Wouldn't it be lovely if the Fed could learn from its (many) mistakes?
Doober: Not necessarily. Remember Lipsey, Lancaster, Bator,. etc. But i do not think they taught us that stuff in Chapel Hill. I remember the theory of 2nd best from undergrad economics; 2nd best may be 1st worst.
DeleteJesse
My recollection is that a second best solution was the best one given the constraints in the system. Not sure when or where I came to that conclusion.In the case of the gold standard I think the preferred solution is a discretionary Fed, but one with good economists running it. Unfortunately that's hard to find.
DeleteNope see page 559-560 of Microeconomics: theory and application D. N. Dwivedi. The issue is that if one Pareto optimal condition is not satisfied then there is nothing to choose among any of the others. I would copy the stuff from the book but i cannot figure out how to do it. Here is the link:
Deletehttps://books.google.com/books?id=IbvULY0ojiEC&pg=PA560&lpg=PA560&dq=theory+of+second+best+in+bator&source=bl&ots=2XTAcLnwEb&sig=ACfU3U2PjeLQ13V2SKnyeyeuBCQVA9oLow&hl=en&sa=X&ved=2ahUKEwiBgov33uDnAhVKSBUIHeaKApcQ6AEwBHoECAcQAQ#v=onepage&q=theory%20of%20second%20best%20in%20bator&f=false
Hal didn't call me Mick for nothing.
Jesse
I don't dispute what you are saying but maybe there is more to it. I cut and pasted the below from wikipedia
DeleteThe Theory of the Second Best concerns what happens when one or more optimality conditions are not satisfied in an economic model. Richard Lipsey and Kelvin Lancaster showed in this paper that if one optimality condition in an economic model is not satisfied, it is possible to have a next-best solution. In other words, given that one of the Paretian optimum conditions cannot be fulfilled, then an optimum situation can be achieved only by departing from all other Paretian conditions. The optimum solution thus attained is the second best solution. This is so because it is achieved subject to a constraint which prevented the initial attainment of Pareto optimal solution.
Yes, we are in agreement. But only if the other Pareto-optimal conditions are violated. Therefore, it is not necessarily the case that what is thought to be the 2nd best is necessarily the 2nd best.
DeleteJesse
Good. I am glad to know that I didn't dream all that up. Now, on to third-best.
DeleteLarry, after being enlightened by your blog, it seems to me that the gold standard is a national principle somewhat analogous to a personal gold standard principle captured in the ancient saying on the Rosetta Stone, "If you ain't got it, don't spend it." We tried to apply this gold standard in raising our children by telling them they had to earn their spending money. This, however, led to them resorting to lives of crime, peddling worthless tabloids such as the HT to gullible neighbors, and charging neighbors for community volunteer service such as filling bird feeders. They later graduated to ice cream parlors, bringing home copious quantities of "stale" inventory, and even later working in places serving alcoholic beverages thereby reaping untold gold in the form of tips. (For some reason our daughters were far more successful in pickpocketing tips than our son.) We hoped that as adults they would straighten their lives out and become honest wage earners, but alas another ancient saying came into play: "Doctor, lawyer, Indian chief." (I forget where this came from. Magna Carta?) At least the older two fulfilled this prophecy; but by the time the younger daughter grew up the job of Indian chief had already been taken by a senator from Massachusetts, and she had to settle for selling Japanese bulldozers and forklifts which somehow seems unladylike - or something.
ReplyDeleteSo, can we draw any conclusions in comparing a national gold standard to this personal gold standard? My conclusion is no, but it was fun to think about.
John, One thought does come up and I am wondering if you have had your annual check up with your psychiatrist. Too many years of placing those debits next to the window seems to have taken a toll on your brain. But alas, I am no model for mental health so I will excuse you and thank you for helping me make this blog as much fun as one could expect given the subject matter. Your main point is well taken, however. Whenever anyone or any state decides it can get away with spending without limit, it will come back to haunt it. Cheers, Larry
DeleteSorry, I should know better. Macro is serious stuff not to be treated frivolously by non-economics lightweights like me (whose pinnacle intellectual accomplishment was taking second place in a 6th grade essay contest in which there were a total of two contestants). And wife's been nagging me about seeing the shrink, too. Called for appointment, but Dr. Freudo was booked and suggested I try more Chopin. Upon reflection, I wasn't sure whether he meant music or vodka, so I'm taking no chances and going heavy on both. May be helping, but some days I'm not sure. Other days I'm not sure.
ReplyDeleteThese days mental health facilities are over-run with former business school professors. You might have a long wait. Until then, think of this blog as therapy and vent your spleen as often as you wish.
DeleteThank you Larry for the post. The history of the gold standard is bit arcane for us biologist / medical types, so this was enlightening.
ReplyDeleteMight one think that the Trump nominee to the Fed who supports a return to the gold standard is really there because she has reversed positions on other matters so as to align with our great leader?
The Horror, The Horror...
Now, how will our senators weigh in on this odd candidate?
Also, gold standard = tight money supply, but national debt is increasing at an escalating pace. How do we reconcile those?
Thank you again Larry for addressing this gold standard matter.
David
Thanks David. You would not want a gold standard with a large national debt. The latter would haunt you. In fact the latter will haunt you no matter the system. Piling debt upon debt cannot be good for a country. Sadly we have economists and pols saying bigger debt is just fine.
DeleteDoober: I can only imagine what the interest rate movement would look like given that we have an open market for gold. The dislocations to the market would be very entertaining. Thanks for your intelligent input.
ReplyDeleteJesse, Thanks for your intelligent input. :-)
Delete