Cato’s David Boaz Turns Goldbug
The Cato Institute usually doesn’t mess around with the way-outside-the-mainstream elements of the libertarian worldview (see Chris Hayes for some of this) and certainly not with the elements of hard-core anti-statism that the business community would find very distressing. But with the economy in crisis, a lot of people are feeling somewhat ideologically discombobulated (myself included, at times) so I suppose it’s not shocking to see some loopy ideas moving closer to the mainstream. At the same time, there’s another trend that Brad DeLong’s been calling attention to, namely the fact that the present crisis has reached a level where even Milton Friedman’s ideas suggest that we should be doing stimulus. Brad, with touching naiveté, seems to think that that means that people normally inclined to admire Friedman should start agreeing that stimulus is a good idea. What’s happening, in fact, is that people normally inclined to admire Friedman are embracing fringy “Austrian” ideas (or Ayn Rand books) since the point of admiring Friedman is to reach the conclusion that government intervention is always economically ruinous.
All of which is by way of introducing the fact that Cato Institute Executive Vice President David Boaz apparently thinks we should adopt the gold standard and abandon “fiat money.” Of course, contractionary monetary policy amidst a sharp worldwide recession would doom us to years and years of misery. And during the Great Depression, nations’ ability to recover was strongly linked to their willingness to abandon gold.
Paul Krugman’s old post on “The Goldbug Variations” is always worth re-reading.
37 Responses to “Cato’s David Boaz Turns Goldbug”
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March 13th, 2009 at 10:29 am
This is unrelated to the idea that people should put their money into gold as a way of saving it from financial collapses, right?
March 13th, 2009 at 10:41 am
Yes, this is a stupid idea, but whether it would doom us to years and years of economic misery would depend upon what price we adopted for gold. If you set the exchange rate at $100,000 ounce, you probably wouldn’t constrain anything for a long time–you would also encourage lots of gold mining!
March 13th, 2009 at 10:42 am
Not completely. The fact that the argument comes up is because people believe in the intrinsic value of gold. For trading purposes, it doesn’t matter if people should believe in the intrinsic value of gold, it only matters that they do.
March 13th, 2009 at 10:48 am
It isn’t just that the wingers learned nothing from the Great Depression. They learned the opposite of what actually happened. In the real world Hoover did very little – and the economy crashed and burned – until Roosevelt took over and stimulated the economy, reviving it with a series of public works programs that had long term benefits for the nation (e.g. roads, bridges, rural electrification). In wingerland Hoover was a liberal democrat and Roosevelt made things worse. It’s utterly surreal. The gold standard (which FDR removed) is just another aspect of the same thing.
March 13th, 2009 at 10:54 am
Interestingly, the current world’s currency (actual notes and coins) is worth about $4 Trillion dollars. The current world’s gold supply is worth about $4.3 Trillion dollars.
A couple of years ago, those numbers would not be very close, with gold being worth about twice as much now as it was then.
March 13th, 2009 at 10:54 am
I tend to think that people who “invest” in “gold” individually face a quite similar risk of not being able to get their money back from the “gold” “brokers” who “sold” their “gold” to them. Unless they actually buy gold bars and store them themselves.
March 13th, 2009 at 10:57 am
“According to the [Austrian] theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or “credit crunch” – commonly called a “recession” or “bust” – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear”, causing resources to be reallocated back towards more efficient uses.”
I don’t know about Yglesias, but it seems to me that someone could read that as a pretty accurate description of the current crisis without realizing that it is the Austrian theory of the business cycle which has been around since the 1930s. If people who basically called the entire situation correctly think that gold might be the answer, I don’t see any good reason to sneer at them for being ‘fringe’ – after all, where exactly has the mainstream (which is evidently so respectable) gotten us?
March 13th, 2009 at 11:03 am
Matt (#4, not Yglesias),
Don’t let the facts get in your way. See for yourself here – the deficit as a proportion of GDP in Hoover’s last year in office, after he went into full blown panic mode – the same Hoover who was doing ‘very little’ according to you – was not surpassed until 1942.
March 13th, 2009 at 11:03 am
6: well, yes and no. In one sense, investing in gold is just another investment strategy – just like investing in yen, or GE stock, or Treasury bonds. If you expect the price of gold to rise, then go for it. (It’s quite a volatile commodity, though, so watch out.)
If you’re investing in it because you’re worried about the breakdown of the world financial system, and you want to be able to trade it for black powder and dried meat – then, yes, you’re right.
Reposted from a few weeks back:
GUIDO. I am a Gold Bug. I believe we should return to the gold standard, because keeping a link between a valuable commodity and the value of the dollar will keep the government honest – they won’t be able to go out printing lots of money and causing hyperinflation, which they can do with a fiat currency.
BRUNO. I am a sensible economist. I see your point, Guido. But I have a suggestion: presumably you don’t think we should go back to just using gold coins – you want to keep cheques and portable banknotes and electronic banking – so in fact what you want is a stable market price for gold.
GUIDO. Yes, I suppose so.
BRUNO. And the government could sustain this in a number of ways. It could simply make it illegal to sell gold at any but the target price, but that would produce a black market. Better, it could buy and sell gold on the open market, in order to push the price up or down when it veered away from its target.
GUIDO. True.
BRUNO. Or it could achieve the same result by changing the money supply – if it printed lots of money, the price of gold would go up, and if it reduced the money supply, the price of gold would go down.
GUIDO. Yes, that would also be possible.
BRUNO. But, Guido, gold alone is a rather uncertain basis for a monetary system – if a great new supply or demand for gold develops, like a new mine, or a new industrial application, it’s going to put exogenous pressures on our economy that we don’t want. Wouldn’t it be better to have not a gold standard but a “basket of goods” standard? The government’s job would be to make sure that your dollar can always be exchanged not for the same weight of gold, but for the same amount of a selection of stuff. I mean, we don’t actually use a lot of gold, per se, but we use a lot of food and oil and TV sets and IKEA wardrobes and crockery and bicycles and so on.
GUIDO. Hmm. A “basket of stuff” standard. Yes, that makes more sense.
BRUNO. And the government’s job, as we said, would be to alter the money supply to make sure that the basket of stuff always cost the same amount of dollars.
GUIDO. Hang on –
BRUNO. Congratulations, you’ve invented inflation targeting. Which is what all central banks do these days anyway.
March 13th, 2009 at 11:28 am
Dan:
“According to the [Austrian] theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system.”
The blindspot in this theory is that low interest rates and the expansion of credit are rational response to a downturn. It’s what made the 87 crash not so bad. It’s what turned things around after Sept 11th and after the early 90s slump.
The Goldbugs get all moralistic about how the currupt bureaucrats are printing easy money to get something for nothing, when monetary easing is a rational response. Otherwise the wild swings of the financial markets could have a negative impact on the wider economy.
March 13th, 2009 at 11:37 am
If anyone in government is seriously considering this, then I’ll have to expect that a lot of that unaccountable bail-out money was spent on gold. Whoever owns the gold, owns the value. I don’t see that as a positive approach to monetary value.
March 13th, 2009 at 11:38 am
i’ll have to suspect
but maybe that’s a freudian slip and I really do expect it
March 13th, 2009 at 12:16 pm
In times like these it becomes more clear that the fiat money system does not simply provide flexibility but works a transformation of the ordinary business cycle into a cycle of more inflation and less inflation. That is the alternative we are working with. Also it is important to bear in mind that this alternative currently grants a privileged place to the dollar above all other national currencies. This has allowed us to borrow our way to prosperity far more effectively than is possible for any other country and more effectively than we will be able to in the future.
We are fixing to try to borrow another couple of trillion in an environment when our biggest lender has said they are worried about their exposure.
March 13th, 2009 at 12:30 pm
Dan – See for yourself here – the deficit as a proportion of GDP in Hoover’s last year in office, after he went into full blown panic mode – the same Hoover who was doing ‘very little’ according to you – was not surpassed until 1942.
This is misleading in several ways.
First of all, by your own link the 1936 deficit was larger in inflation-adjusted dollars than anything under Hoover. The 1934 deficit was larger as a percentage of GDP, but this is because the GDP had utterly collapsed under Hoover. The deficit subsequently declined as a percentage of GDP in part because the economy was growing.
Second, and more importantly, the final year listed for Hoover is 1934. According to the footnote, fiscal 1934 began in October 1933. FDR was inaugurated in March 1933 and passed a large amount of legislation in his first 100 days. I’m fairly certain that your website’s decision to credit the 1934 budget to Hoover is an error.
I don’t know anything about the American Presidency Project at UCSB, but this sort of gamesmanship with the numbers is par for the course where Cato is concerned.
March 13th, 2009 at 12:35 pm
Yes, because what we really want to do is give China effective control of our monetary policy. There’s no way that can go wrong, is there?
Seriously, who are these nutjobs?
March 13th, 2009 at 12:38 pm
Following up on #14, I’ll also point out that Dan’s website correctly credits the fiscal 2002 budget to George W. Bush, (this being the fiscal year that began in his first year in office) but incorrectly assigns the fiscal 1934 budget to Hoover (this being the fiscal year that began in FDR’s first year in office).
So Dan, please try not to let your “facts” get in the way of the real historical record.
March 13th, 2009 at 12:40 pm
Re “Paul Krugman’s old post on “The Goldbug Variations” is always worth re-reading.”
————–
Well, that chart showing Gold appreciating by about 400 percent over the last Administration is worth reading as well. Also, that chart showing the real value of the S&P 500 falling through the floor.
Assault rifles and amno are doing pretty well also.
March 13th, 2009 at 12:42 pm
You’re criticizing Boaz on the basis of the fact that an immediate return to the gold standard would, indeed, be extremely painful – but his article seems to be a rather more general one, along the lines of ‘hey, a gold standard would have avoided these problems. Something to think about going forward, and a reason to take it more seriously.’.
@Marc: … They learned the opposite of what actually happened … In wingerland Hoover was a liberal democrat and Roosevelt made things worse. It’s utterly surreal. The gold standard (which FDR removed) is just another aspect of the same thing.
You have observed the problem, even if I disagree with your framing. Two people can look at the same historical events and disagree about how things would have turned out in various counterfactual scenarios. It’s impossible to conclusively prove that Roosevelt made things better; you just end up making various arguments, but they depend on your prior assumptions. Given that, there is nothing ’surreal’ about the right-wing view of Roosevelt; it is a reflection of differences in underlying assumptions about how things work.
As an aside, Roosevelt didn’t do away with the gold standard entirely. The government still used gold to guarantee some of its debt, which is why Roosevelt felt it necessary to confiscate the gold held by the public. It was not until 1971 that the government went fully off the gold standard.
@matt Yes, this is a stupid idea, but whether it would doom us to years and years of economic misery would depend upon what price we adopted for gold.
You don’t get it. Prices would be set *in gold*, and we wouldn’t be able to adopt a particular price.
I think one interesting point to be made is that the current inflation of our money supply does not result from a large excess of actual currency, but from the growing ability of our financial system to treat debt and debt instruments as money. The gold standard would address that only indirectly. Steve Keen wrote an interesting article on this (’roving cavaliers of credit’). To the extent that the gold standard kept banks from lowering interest rates to unnatural levels, it would limit the growth of debt bubbles, but it wouldn’t eliminate them entirely.
March 13th, 2009 at 12:58 pm
hey, a gold standard would have avoided these problems. Something to think about going forward, and a reason to take it more seriously
And yet the only benefit to the gold standard identified in this article is that it tends to slow the growth of the money supply. This is something the Fed is also capable of doing in a non-arbitrary non-blunt-instrument manner.
The failure of the Fed Policy under Greenspan and Bernanke was human error. Namely, they subscribed to crackpot libertarian theories other than goldbuggery and assumed that economic growth driven by historically low interest rates, leveraged spending, asset inflation and deregulated arcane financial derivatives was superior to slower, more stable economic growth.
The only case I can see for the gold standard is to assume that humans are too inherently venal and stupid to manage the money supply, and therefore we should base the value of everything in society on the supply and demand of shiny things. And hey, there are times when this starts to sound appealing. But it seems to me that the simpler solution is to stop listening to libertarians.
March 13th, 2009 at 1:12 pm
The Lords of Finance by Liaquat Ahamed, a new and excellent study of the role of the central banks in events leading to the Great Depression, should be of interest to anyone trying to make sense of the current crisis. Ahamed makes it very clear how differences in the way the major economies handled the gold standard is the main explanation for international differences in the timing and severity of the Great Depression. Generally, getting off the gold standard was the most important step in turning the economy around.
March 13th, 2009 at 1:22 pm
The failure of the Fed Policy under Greenspan and Bernanke was human error.
Indeed so (and let’s not blame Bernanke too much, he arrived on the tail end of this fiasco). But in ascribing it to ‘crackpot libertarian theories’ I think you are making a mistake. First, you are trying to make it seem like Greenspan’s error was much more avoidable than it was, by describing him as some sort of out-of-the-mainstream figure. Greenspan was *extremely widely respected*, in quite a bipartisan fashion (see here for a fairly tpyical view of him at the time). I doubt Clinton would have kept him on if he had been viewed as some sort of crackpot. In parallel, I think you take a rather unfair swipe at libertarians in asserting that they support the financial bank’s low interest rates and asset inflation; the only figure I can think of who regularly challenged Greenspan on his policies, going back to 2002 at least, is Ron Paul. In the case of deregulation you have a better point, though libertarians at least have the virtue of consistency in being against a taxpayer bailout of those who bought (or sold) the arcane financial derivatives. And which President was it that signed off on the repeal of Glass-Steagall, anyway?
Anyway, the point of the gold standard is not that an enlightened central banker couldn’t make better choices; it’s that we want a system that doesn’t rely on an unreasonable amount of human virtue. Cf. the general philosophy of the founding fathers, who tried to devise a system robust against a certain amount of human folly and venality.
March 13th, 2009 at 1:29 pm
18 the gold standard would not eliminate debt bubbles, but it would make it impossible for the central bank or treasury to make a political decision to bail out the most egregious bubbles. Whether this would have had a salutary effect on the behavior or investors and bankers is an open question.
March 13th, 2009 at 1:40 pm
Re LaFollette at 19: “The failure of the Fed Policy under Greenspan and Bernanke was human error. ”
————-
I disagree.
As I noted earlier, I think Theft from the Taxpayers is built into the system. See http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?_r=2&em
We sent men to the Moon time after time and returned them to earth within 3 miles of a recovery ship. We fly thousands of planes every day and land them safely. It is ridiculous to say that the Leviathan can’t monitor and control thieves.
The problem/difficulty lies in controlling political corruption, not controlling financial systems. Fix our campaign finance system, fix our lying News Media, and a lot of other problems will become a lot easier to solve.
March 13th, 2009 at 2:17 pm
bbartlog:
the only figure I can think of who regularly challenged Greenspan on his policies, going back to 2002 at least, is Ron Paul.
You must be relatively young if you don’t remember Henry Gonzalez who was a thorn in Greenspan’s side.
http://en.wikipedia.org/wiki/Henry_B._Gonzalez
http://www.creators.com/opinion/molly-ivins/molly-ivins-november-30-2000-11-30.html
———————
I haven’t really examined Goldbugism because it’s such a minority view however vocal. When the Gold Standard is in effect supposedly there can’t be bubbles, or more accurately what Doug says: central banks can’t bail out debt bubbles. Maybe this will lower the Moral Hazard.
However, what if there is a downturn for various reasons or rather what happens when there is one? You just grind it out and hope things will turn naturally after a while? Or you end up with a World War? Are Gold Bugs liquidationists?
This is similar to what I pointed out in an earlier comment which nobody responded to.
March 13th, 2009 at 2:47 pm
You just grind it out and hope things will turn naturally after a while?
Pretty much. This is what happened in the 19th century. There were periodic episodes of deflation, which would lead to debtors being crushed as their real debts grew. The burden this put on farmers (who were frequently in debt due to the need for capital) was what led to William Jennings Bryan’s ‘Cross of Gold’ speech. The current, more inflationary regime tends instead to screw over creditors, as a whole generation of retirees is in the process of finding out.
Thanks for the reference to Gonzalez, I do vaguely remember him now, but I wasn’t following politics that closely when he was in office.
March 13th, 2009 at 2:51 pm
I disagree that Cato “usually doesn’t mess around with the way-outside-the-mainstream elements of the libertarian worldview.” Look at Alan Reynolds’ recent screed about capitalism being dead in America. Look at their hatred of Social Security. Look at their positions and staffing on climate. They’re easily 2 standard deviations from the mainstream. They advocate eliminating the gasoline tax and support for basic research on alternative energy resources. They even oppose long-range transportation planning. Even for libertarians, they’re kooky on a lot of issues.
March 13th, 2009 at 3:03 pm
It is possible to simultaneously distrust the central bank concept & think goldbuggery is nonsense.
Just wanted to point that out.
March 13th, 2009 at 3:18 pm
Gold is just as much “fiat money” as anything else.
March 13th, 2009 at 3:42 pm
They’re easily 2 standard deviations from the mainstream
You should talk to some real people instead of forming your ideas about the range and distribution of political ideas from the mass media.
Two standard deviations would mean the most outlying two percent (or perhaps four percent, considering both tails of a two-tailed distribution). It’s actually pretty hard to find a proposition that *only* two percent of people will support, but here’s some other beliefs and percentages:
Favor laws against interracial marriage: 10%
Believe that the moon landing was faked: 6%
Believe that the WTC was brought down by high explosives: 16%
Believe that humans are the result of millions of years of natural evolution: 10%
And so on. Cato may be one end of the Overton Window, but real radicals they ain’t.
March 13th, 2009 at 3:52 pm
Banks create money by the act of lending. So the “fiat” money that gold bugs think is the root of all evil and the cause of our current mess was not created by the government at all. It was created by unaccountable, over privileged executives and employees of private corporations.
They lent billions of dollars to millions of borrowers who had no realistic prospect of paying it back. They obscured their debtors’ fundamental credit unworthiness with multiple layers of complexity, by bundling the mortgages into complex, proprietary mortgage/insurance/stock hybrids which were sold to speculators as high profit, low risk miracle investments.
All that money, created by all those loans that should’ve never happened, caused massive inflation of house prices. Now that the lending spree is over, all that money disappeared, causing massive deflation of house prices.
So the gold bugs are not crazy to think the bust housing bubble is monetary in nature. They don’t realize however, that the fiat came from their friends on Wall Street, not their foes in Washington and reinstating the gold standard would have the same effect, only much worse.
March 13th, 2009 at 4:52 pm
The only good argument for the gold standard is that gold can’t be faked, so it keeps the treasury honest.
They serve the same role as peacock feathers: they send an obvious signal that is harmful to the sender. For peacocks – they have not camouflage so they must be able to fend off attackers. For central banks, they can’t debase the currency. The gold standard would help Zimbabwe right now.
For the US, with a central bank with a long and (relatively) good record, it is unduly restrictive. That said, I keep a small percentage of my investments in gold as a hedge against a fall in the dollar. And I’m fairly certain that our fiscal and monetary policy, in the medium term (5-10 years) will be inflationary. Not Zimbabwe level, but Carter era. So while the gold standard is a bad idea, holding some isn’t.
March 13th, 2009 at 6:02 pm
Money has two functions. It serves as a store of wealth and as a medium of exchange. Gold bugs usually concentrate on the former and discount the latter. The idea of some perfect, unchangeable and immutable money is beautiful and would seem to mandate justice and fairness. It is easy to fall under this spell. Modern economics is the study of exchange and transaction. Devoted to the operative role of money and discounting when not ignoring the store of value part.
I am no gold bug but debate is always good to have about what our money is. In a very fundamental way so many of the things progressives decry, particularly mindless endless consumption to the detriment of the environment, is a function of the economic/market system which demands growth always. When growth is an imperative the endless one way growth of money is also an imperative. Which means the transactional role of money must be paramount.
The modern floating exchange rate system where money can be printed at will is certainly kind of crazy. Especially now that the Bank of England and the Fed are printing money for real in significant amounts with the implicit guarantee that there is no limit to what they will print. This threat was always the deepest fear of the gold bugs and now that fear is realized.
There is an oddity in the printing regime however. The printed money is being used to buy up financial assets so that those assets don’t lose value. So their price does not fall further and perhaps to actually make their prices rise. Which has nothing to do with the transactional phase of money except the vague promise that this propping of assets will lead to more lending, soon, or perhaps latter, to everyone benefit.
It should be obvious that the store of value today, on a systematic basis, is married to asset prices. Not the asset that is gold or thus money itself but rather the intangible things money buys. Mixed up in this is the conservative notion that money spent by the government, much less printed, that goes to people for consumption, rather than to boost asset values is evil.
We have gone down the rabbit hole. Throw in that our money is actually debt. That each dollar in your pocket is actually a claim on the debt of the United States Treasury and headaches can ensue.
Money is an abstraction, even gold money. There is no perfect answer. Americans love easy money and easy credit. Growth is our religion. Always bet that America will always opt for a system that produceds the maximum amount of money and credit. In other words, gold bugs are howling at the moon.
March 13th, 2009 at 7:20 pm
dmo:
Gold can certainly be faked. You can clip gold (cut off bits and make them into a new coin), sweat gold (collect the tiny shavings of gold that fall off the coins as they are worn down with use), plate gold (melt them down, then coat non-gold coins with gold), adulterate gold (melt them down, then mix with cheaper metals), or replace gold (use some gold-looking metal instead). It’s true that an expert can catch these things, but not before they’ve circulated throughout the economy, causing a lot of inflation.
There’s a reason why forgery used to be punished by cutting off people’s hands.
March 13th, 2009 at 10:29 pm
The blindspot in this theory is that low interest rates and the expansion of credit are rational response to a downturn.
Not if that credit is not backed up by real resources. Credit ultimately comes from savings (i.e. producing something and not consuming it). Low interest rates not due to increased savings and artificial credit expansion simply make people think that there is more to invest than there is, and causes people to invest in too many enterprises which there are not the resources to complete.
Money has two functions. It serves as a store of wealth and as a medium of exchange. Gold bugs usually concentrate on the former and discount the latter.
Not really. Gold is preferred because it is market money.* That is, the market determined that gold served as a good medium of exchange. Invariably, paper money that is not a proxy for some tangible good (i.e. backed by gold, silver, or something else) is always imposed by the state. that’s why it is called “fiat,” because its value is declared by state fiat, rather than by the preferences of consumers.
*Private money is almost always a commodity, such a gold, silver, cigarettes, or tobacco leaves.
March 13th, 2009 at 10:31 pm
the present crisis has reached a level where even Milton Friedman’s ideas suggest that we should be doing stimulus. Brad, with touching naiveté, seems to think that that means that people normally inclined to admire Friedman should start agreeing that stimulus is a good idea. What’s happening, in fact, is that people normally inclined to admire Friedman are embracing fringy “Austrian” ideas (or Ayn Rand books) since the point of admiring Friedman is to reach the conclusion that government intervention is always economically ruinous.
I was turning my nose up at Friedman and supporting Austrian ideas way back in 2000, long before the current downturn.
March 14th, 2009 at 12:52 am
Re: Believe that humans are the result of millions of years of natural evolution: 10%
I don’t know where you got that, but I’ve never seen a poll that put acceptance of evolution at so small a percentage. It’s smaller than the number of non-religious secularists in our society, which is is rather dubious when you think about it.
March 14th, 2009 at 5:51 pm
@StevenAttewell
Even goldbugs aren’t suggesting we return to gold coins. Gold-backed currency would still be paper, but it would be redeemable for gold.