The Leaden analysis of gold
The recently ran an article trashing the idea of a return to a gold standard. A growing number of Republicans, including presidential hopeful Senator Ted Cruz, advocate fxing the value of the dollar to gold.
The Times piece encapsulates some of the egregious myths, misunderstandings and just plain ignorance of what a gold standard is all about.
The purpose of a gold standard is to ensure that a currency has a fxed value, just as measures of time, weight and distance are fxed. We don’t “foat” the number of minutes in an hour or inches in a foot. Yet, strangely, economists believe that constantly changing the value of a currency is good for growth.
For a variety of reasons, which are explained in my new book, Reviving America, and in my previous one, Money, gold keeps its intrinsic value better than anything else on Earth. It is to value what Polaris is to direction. The daily dollar price changes in gold refect changing perceptions in the marketplace about the current and future value of the greenback. Gold’s value is unchanging.
A few of the widespread misconceptions about gold: • Gold restrains economic growth. It does the opposite. When the value of a currency is stable, investment fourishes—and so does economic activity. For instance, from about two years after WWII to when we cut the dollar’s link to the yellow metal in 1971, the average annual growth in our industrial output was an astonishing 5%. After that it slumped to less than half that amount.
Our overall average rate of growth since going of gold more than 40 years ago is measurably lower than it was before.
Linking a currency to gold doesn’t mean “price stability”—it means that prices will refect the actual interplay of supply and demand. • Gold dangerously constricts the fexibility of authorities to respond to crises. No, it doesn’t. Goldbased money has nothing to do with the ability of a cen- tral bank to mitigate a fnancial crisis by acting as a “lender of last resort.” During a panic or time of distress, a sound bank need merely bring collateral to the central bank for a short-term loan to weather a temporary crisis. When things calm down, the loan is paid of. • Gold artifcially constrains the money supply, thereby hurting the economy. This is a variant on the frst bullet. Under this myth the money supply is tied to the output of gold mines. If output goes down, so will economic activity.
There are two big things wrong with this. Gold isn’t subject to the supply shocks that afect other commodities. For example, it’s not like wheat, which, once it’s harvested, is mostly consumed. Every ounce of gold ever brought out of the ground is still with us. Annual output averages about 1.5% to 2% of the existing supply.
Second, the amount of gold doesn’t restrict the money supply any more than the supply of rulers would restrict the size of a house you might construct. It merely ensures that money has a fxed, stable value. As noted monetary expert Nathan Lewis has pointed out, from 1775 to 1900 the U.S. grew from a small agricultural economy of 2.5 million people to the world’s mightiest industrial nation of 76 million people. During most of that time the dollar was fxed to gold. The global output of gold went up 3.4-fold, yet the U.S.’ money supply burgeoned 163-fold.
What virtually all economists fail to grasp today is that you can have a gold-based currency without owning a single ounce of gold. We could set the dollar/gold ratio at, say, $1,100 an ounce. If the price rose above that level, it would mean there was too much money in the economy, and the Fed would tighten. If it dropped below, the Fed would ease.
The crux of the gold debate is about power: The New York Times and many economists like the idea of government dominating the economy; honest money advocates don’t.