Tuesday, November 16, 2010

Gold standard update

Quick update on the gold standard issue (see earlier post here). A few days ago, the New York Times featured an op-ed by James Grant, a fairly prominent financial pundit, supporting the reintroduction of the gold standard. In "How to Make the Dollar Sound Again," Grant claims that "In its utility, economy and elegance, there has never been a monetary system like [the classical gold standard."

What is funny about this claim is that Grant seems to think that monetary systems are to be judged for how they treat money ("[money] went where it was treated well"), rather than how they treat the people who use that money. And the key problem with the gold standard is that it is not so great for the average citizen.

The gold standard forces the money supply to expand at the same rate as the gold supply in a country, which is a rate determined both by the total world supply of gold and by the demand for gold in other countries (either for their own gold standard, or for other uses such as jewelry).
Meanwhile, economic production expands at a rate that is largely independent of the changing gold supply.

This means, almost inevitably, that there will be periods of deflation. Now deflation is not a big problem for the owners of capital (i.e. the wealthy, such as James Grant), but it is rather unpleasant for those who have any form of debt (i.e. most Americans). Indeed, the deflation induced by adherence to a gold standard was the single most salient political issue in the 1896 U.S. presidential elections, and produced what has been called "the most famous speech in American political history": William Jennings Bryan's "Cross of Gold" Speech (link includes audio recording of Bryan reading the speech).

Grant disingenuously cobbles together some random anecdotes and factoids to suggest that a reintroduction of the gold standard would be a good idea today. I do not know why the NYT deigned to publish his piece, but I think the concluding paragraph of Bryan's speech is a fitting rejoinder:

"If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

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