The Gold Bug Variations
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.
The
current world monetary system assigns no special role to gold; indeed, the
Federal Reserve is not obliged to tie the dollar to anything. It can print as
much or as little money as it deems appropriate. There are powerful advantages
to such an unconstrained system. Above all, the Fed is free to respond to
actual or threatened recessions by pumping in money. To take only one example,
that flexibility is the reason the stock market crash of 1987--which started
out every bit as frightening as that of 1929--did not cause a slump in the real
economy.
While a freely floating national money has
advantages, however, it also has risks. For one thing, it can create
uncertainties for international traders and investors. Over the past five
years, the dollar has been worth as much as 120 yen and as little as 80. The
costs of this volatility are hard to measure (partly because sophisticated
financial markets allow businesses to hedge much of that risk), but they must
be significant. Furthermore, a system that leaves monetary managers free to do
good also leaves them free to be irresponsible--and, in some countries, they
have been quick to take the opportunity. That is why countries with a history
of runaway inflation, like Argentina, often come to the conclusion that
monetary independence is a poisoned chalice. (Argentine law now requires that
one peso be worth exactly one U.S. dollar, and that every peso in circulation
be backed by a dollar in reserves.)
So, there
is no obvious answer to the question of whether or not to tie a nation's
currency to some external standard. By establishing a fixed rate of exchange
between currencies--or even adopting a common currency--nations can eliminate
the uncertainties of fluctuating exchange rates; and a country with a history
of irresponsible policies may be able to gain credibility by association. (The
Italian government wants to join a European Monetary Union largely because it
hopes to refinance its massive debts at German interest rates.) On the other
hand, what happens if two nations have joined their currencies, and one finds
itself experiencing an inflationary boom while the other is in a deflationary
recession? (This is exactly what happened to Europe in the early 1990s, when
western Germany boomed while the rest of Europe slid into double-digit
unemployment.) Then the monetary policy that is appropriate for one is exactly
wrong for the other. These ambiguities explain why economists are divided over
the wisdom of Europe's attempt to create a common currency. I personally think
that it will lead, on average, to somewhat higher European unemployment rates;
but many sensible economists disagree.
So where does gold enter the picture?
While some
modern nations have chosen, with reasonable justification, to renounce their
monetary autonomy in favor of some external standard, the standard they choose
these days is always the currency of another, presumably more responsible,
nation. Argentina seeks salvation from the dollar; Italy from the deutsche
mark. But the men and women who run the Fed, and even those who run the German
Bundesbank, are mere mortals, who may yet succumb to the temptations of the
printing press. Why not ensure monetary virtue by trusting not in the wisdom of
men but in an objective standard? Why not emulate our great-grandfathers and
tie our currencies to gold?
Very few
economists think this would be a good idea. The argument against it is one of
pragmatism, not principle. First, a gold standard would have all the
disadvantages of any system of rigidly fixed exchange rates--and even
economists who are enthusiastic about a common European currency generally
think that fixing the European currency to the dollar or yen would be going too
far. Second, and crucially, gold is not a stable standard when measured
in terms of other goods and services. On the contrary, it is a commodity whose
price is constantly buffeted by shifts in supply and demand that have nothing
to do with the needs of the world economy--by changes, for example, in
dentistry.
The United States abandoned its policy of
stabilizing gold prices back in 1971. Since then the price of gold has
increased roughly tenfold, while consumer prices have increased about 250
percent. If we had tried to keep the price of gold from rising, this would have
required a massive decline in the prices of practically everything
else--deflation on a scale not seen since the Depression. This doesn't sound
like a particularly good idea.
So why
are Jack Kemp, the Wall
Street
Journal , and so on so
fixated on gold? I did not fully understand their position until I read a
recent letter to, of all places, the left-wing magazine Mother
Jones from Jude Wanniski--one of the founders of supply-side economics
and its reigning guru. (One of the many comic-opera touches in the late
unlamented Dole campaign was the constant struggle between Jack Kemp, who tried
incessantly to give Wanniski a key role, and the sensible economists who tried
to keep him out.) Wanniski's main concern was to deny that the rich have gotten
richer in recent decades; his letter is posted on the Mother
Jones Web site, and makes interesting reading.
But, particularly noteworthy was the following passage:
First let us get our
accounting unit squared away. To measure anything in the floating paper dollar
will get us nowhere. We must convert all wealth into the measure employed by
mankind for 6,000 years, i.e., ounces of gold. On this measure, the Dow Jones
industrial average of 6,000 today is only 60 percent of the DJIA of 30 years
ago, when it hit 1,000. Back then, gold was $35 per ounce. Today it is
$380-plus. This is another way of saying that in the last 30 years, the people
who owned America have lost 40 percent of their wealth held in the form of
equity. ... If you owned no part of corporate America 30 years ago, because you
were poor, you lost nothing. If you owned lots of it, you lost your shirt in
the general inflation.
Never mind the question of
whether the Dow Jones industrial average is the proper measure of how well the
rich are doing. What is fascinating about this passage is that Wanniski regards
gold as the appropriate measure of wealth, regardless of the quantity of other
goods and services that it can buy. Since the dollar was de-linked from gold in
1971, the Dow has risen about 700 percent, while the prices of the goods we
ordinarily associate with the pursuit of happiness--food, houses, clothes,
cars, servants--have gone up only about 250 percent. In terms of the ability to
buy almost anything except gold, the purchasing power of the rich has soared;
but Wanniski insists that this is irrelevant, because gold, and only gold, is
the true standard of value. Wanniski, in other words, has committed the sin of
King Midas: He has forgotten that gold is only a metal, and that its value
comes only from the truly useful goods for which it can be exchanged.
I wonder whether the gods
read Slate. If so, they know what to do.
