The True Gold Standard (Second Edition)
This just in:
In a July 6 New York Times "Conscience of a Liberal," in an entry entitled The Armageddon Caucus, columnist and Nobel economics laureate Paul Krugman -- perhaps the most vociferous living foe of the gold standard -- says:
So consider, now, what’s going on politically. Gold bugs have taken over the GOP; even if they can’t reimpose the gold standard, they will make it very hard for future Bernankes to do even as much as the current one did to fight the crisis. And there’s a big push on not just to downsize government, but to convert federal programs like Medicaid and unemployment insurance into block grants, more or less ensuring that they will be cut rather than expanding in a slump. (Emphasis supplied.)
Mr. Krugman, unequivocally one of the left's most gifted polemicists -- with a Nobel Prize in Economics with which to establish his prestige -- has a long history in opposition to gold. In 1996 he wrote:
SYNOPSIS: The Gold Standard is an Economic myth whose only benefit is it sounds good
The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange--a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.
But there are many people--nearly all of them ardent conservatives--who reject that lesson. While Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago. With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless, these are influential people--they are one of the factions now struggling for the Republican Party's soul--and the passionate arguments they make for a gold standard are a useful window on how they think.
There is a case to be made for a return to the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical.
There is an irony here. Today's chief proponents of gold take the position that gold has a much better track record, as Lewis E. Lehrman puts it, "in the laboratory of history" than does the fiduciary currency standard of which Mr. Krugman is among the most celebrated champions. We "gold bugs" take the position that the proponents, like Mr. Krugman, of monetary policy managed in the discretion of experts are the ones engaged in magical thinking. In last week's July 9th Washington Post gold standard proponent (and TGSN senior advisor) James Grant writes an elegant analysis of why faith-based money is bad for the economy and why the gold standard is good, noting:
“'Deficits without tears,' the French economist Jacques Rueff called these seductive arrangements."
So the argument now is joined and neatly framed.
Are the proponents of the gold standard being "mystical?"
Or are the proponents of a fiduciary system managed in the discretion of elite civil servants "seductive."
We cannot both be correct. In the 40 years since President Nixon abandoned ("temporarily") the remnants of the gold standard an enormous amount of data has been accumulated.
Yes, Mr. Krugman. The gold bugs have taken over the GOP. The critical question now is being tried in the supreme court of public opinion.
We "gold bugs" could not have hoped for a worthier adversary as "counsel for the defense" in the indictment of inconvertible paper money than Paul Krugman.
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