The FT carries news this morning that the Republicans want to investigate a return to the gold standard.
That's the arrangement where a countries currency is fixed against the price of gold and not the value of what it can earn for itself.
So the laws of supply and demand for the currency are suspended.
And the opportunity to set interest rates to suit domestic need are foregone. The rate is set instead to ensure that there is a balance on exchange flows to ensure that gold parity is maintained.
And the right to print money - the one thing that has saved the UK and US from an EI style fate - is given up since the quantity of gold determines how much money there is.
And if the gold price varies - as it has enormously - so does the value of your trade - with massive resulting risk.
And the opportunity for a country to price its population into work is foregone - with all the consequences seen until the standard was abandoned in the 1930s.
All that so that the global wealthy elite can think there money - I stress their money - is worth something whatever happens to the people in the country where they live.
I mean very genuinely that these people are either mad or bad or both.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I read “lords of Finance” by Liaqat Ahmed during the holiday.The author is or was, a hedge fund manager. It tells us about the heads of the central banks of America, France, Germany and the UK. The reparations and slavish adherence to the Gold Standard , he says, were to blame for the Great Depression (and I would add all that followed-including WW2 and rise of a totalitarian super power in the USSR.)
He says “breaking with dead hand of the gold standard was the key to economic revival” (page 477). Even Keynes was reluctant at first to give it up. Established ideas take a lot of effort to move. Sticking with an imagined past- “always better in the old days”- saves having to make the effort to deal with the present.
The long growth in living standards in the Western World after WW2 was due, in large measure, to Keynes’ innovative ideas. Not all were implemented at Bretton Woods as the the US could call the shots.
I wonder if he were around today whether he would be preaching Modern Monetary Theory? I suspect that he would have a clear and practical idea what should be done.
Good book
Good questions…
Richard – mad and bad. The madder they get the badder they are. The badder they become the madder they get and so on.
I don’t have a strong view about this, but is it just coincidental that when Nixon came off the gold standard in 1971 it pretty much coincided with the decline in real average wages in the US?
Wouldn’t a return to the gold standard effectively sunder the USD’s status as the global reserve currency? Why would the American plutocracy want this, since it’s worth countless billions to them due to so much of the world demanding dollars in order to trade? In fact, haven’t India and China been mulling over fixing currencies to gold precisely for this reason?
They’re certainly bad but on this they seem even more mad.
‘Is Europe on a Cross of Gold?’ column by Barry Eichengreen at Project Syndicate tells all here.
It does seem that the republicans are desperate to do whatever they can to make themselves unelectable.
It would be interesting to see what rate of exchange between USD and gold would be chosen in view of all the dollars “created” in loans over the years. Is there enough gold in the world and do we include the gold-coated tungsten bars with almost identical specific gravity but about 10% metallic value?
I have increasingly come to the view that the modus operandi of the Republican party is simply to push political discourse as far to the right as can be achieved at any given time so that once that seems like a normal view they can push even further right next time around. Look at what happened with healthcare after President Obama surrendered and adopted the Heritage Foundation plan. What had once been Republican policy was immediately dismissed as “far left” and the party seized the opportunity to go even further to the right on the matter. One wonders if there is any limit at all to where they plan to go.
As for the Gold Standard, it is the utter height of stupidity. Not only does it have the problems already mentioned, but once you realise that credit is actually generated endogenously, then it follows that the central bank has to follow all sorts of counter productive policies to try and keep the value of the currency stable against gold.
Plus there is the fact that the more dependent the economy is on gold, the more resources have to be spent digging up and storing gold.
The real problem here is that there is a genuine need for an international reserve currency that neither SDRs and the US$ can now fulfil, and going back to a largely useless metal would be a retrograde step.. Perhaps the time has now come Keynes/Kaldor’s Bancor which is a commodity based reserve currency – especially since it would mean that the governments would have to fire power to blow hedge funds and other destructive speculators in commodities out of the water when they play their silly games.
As ever – Keynes was right
I was reminding myself about it a few weeks ago. Do you know of a good source-for a non economist /accountant like me- about bancor?
No – not even sure Skidelsky hits it in that way
This is a very big issue and the Left needs to get its act together rather than letting others do the running. There are very large benefits to be obtained from being able to print/produce a currency which everyone in the world is prpepared to hold long term as settlement for its debts – the US may well lose that benefit (and the disruption that could occur as a result should worry us all) but I wouldn’t want to give that benefit to China or Russia as a major gold producer.
My personal view would be that if you want gold buy gold. Likewise if you want anything else buy that with your fiat currency. It is best to stick with personal choice in this area.
In much the same way that boom and bust wasn’t eliminated and fiscal alchemy couldn’t possibly lead to eternal economic expansion you can bet your non-gold backed US dollar that inflation will return in due course. Today we have surprisingly low rates of interest and inflation, in much the same way that we had amazing economic growth a decade ago and an amazing dotcom boom before that.
Anybody that thinks there will be no inflation deludes themselves, but inflation is the great escape route for governments when they have taken on more debt than they will ever repay.
That’s, very politely, a small world view from someone who has probably benefitted enormously from inflatio
I am in my late 30’s so I haven’t seen any benefit from inflation, but I am old enough to know all these experts keep getting it wrong and everything goes in cycles.
No currency (e.g. the USD) has ever been, or ever could be, ‘anchored’. There is simply no process by which this could be achieved. It is instructive to try to imagine such a process. Perhaps the head of the United Nations could stand on a very large soapbox with a very large loudhailer, and make a ‘proclamation’ that the value associated with the dollar would from now on be linked to the value of 1/20th of an ounce of gold (1791-1933) or 1/35th of an ounce of gold (1933-1971), or even to some more abstract concept such as ‘a unit of labour’. Perhaps the head of the United Nations could then ‘exhort’ the population at large to ‘bear that in mind when shopping’? Would naïve shoppers have to start evaluating their potential purchases for worth against the value-density of gold, or even to some more abstract concept such as ‘a unit of labour’? If a shopper wanted to buy a good at a higher price than last week (assuming they could remember historic prices and qualities), would they have to also select something else at a lower price than last week before they were allowed to purchase? Surely, logic and history has long since established that naïve economic agents in the market would fail to notice, fail to understand, or simply ignore, any such ‘proclamations’ and/or ‘exhortations’.
Whenever there has been such a linkage (extremely rare in practice), it has always been the other way round:
The value associated with the Currency was always the exogenous factor in any such linkage (i.e. it was the externally-determined given). The value associated with each currency (e.g. the USD) was determined on a rolling macro-economically-incidental basis by millions of naive economic agents agreeing millions of prices each day.
The value-density of the commodity concerned (e.g. gold) was always the endogenous factor in the linkage (i.e. it was always determined by wilful policy). Invariably, there was ‘interference’ by ‘the authorities’ (such as the Bretton Woods agreement); interference which amounted to a crude attempt to rig the market in the commodity concerned (e.g. gold). Such agreements established closed networks of ‘responsible’ and ‘bottomless’ suppliers and demanders (i.e. central bankers) who all colluded in agreeing to ‘transact’ (i.e. buy and sell) at a ‘proclaimed’ price irrespective of supply and demand in the ‘free’ or ‘black’ markets. All such agreements persisted only until ‘free’ market sentiments moved too far against them, and then capitulated (e.g. the UK in 1918 and 1931, and the US in 1933 and 1971). Without such ‘interference’ by ‘the authorities’, the very idea of such a linkage would have been a deceit. There would always have been a ‘going price’ in the ‘going Currency’ for each item of precious-cash based on its (assumed) content and/or its ‘collector’s valuation’ (and irrespective of its ‘face’ value). Thus, the Bretton Woods agreement should be seen not as an attempt to anchor the value associated with the US Dollar to the ‘market’ value of some form of gold ‘money’, but as an (ultimately futile) attempt to rig the ‘market’ value of gold (‘money’ and non-‘money’ without distinction).
The same perverted logic is currently being applied to the currently-low ‘market’ rates of interest on UK gilts. The current government proclaims that those currently-low rates are indicative of ‘confidence in the UK austerity program’. It is no such thing. The current BOE quantitative easing programme has ‘rigged the market’ in UK Gilts by acting as bottomless buyer; leading to artificially-high market-prices. The currently-low interest rates on UK gilts are an incidental consequence of that market rigging. When quantitative easing is reversed (as it inevitably must), and the BOE reverses from bottomless buyer to bottomless seller, the market prices will reverse from artificially-high to artificially-low, and the (incidental consequence) rates of interest will switch from artificially-low to artificially-high. It’s a classic bubble, with an inevitably-classic bust to follow.
Restoring the gold-dollar link (abolished in 71), not the gold standard (abolished in the early 1930s) is presumably what is meant, and obviously while both are insane, the latter would be utterly infeasible. The former means that Fort Knox would have to sold sufficient gold reserves to back (a proportion of) dollars in circulation. If implemented, it would cost the US Treasury squillions, and send the gold price up even further—good news for gold bugs (who tend to be very wealthy). It also means that the external deficit would need to be eliminated—and this could only be done by huge ‘austerity’ measures. It sounds like madness I know, but it’s really a logical extension of current right-wing orthodoxy.
Time for someone to write “The Economic Consequences of Mr Romney”….