Tuesday, November 9, 2010

Golden restraint

I touched on the … logistical difficulty … of returning to a gold standard just a while ago. I opened the piece with a quote from Megan McArdle on the subject before veering off. Here’s the relevant part of Megan’s post:

"In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg).

Read the whole thing, as they say. Then read the Wikipedia entry on Gresham’s Law. And read a little history. “Hard” money, that is to say, money that is commodity-backed, has never prevented debasement of the currency when politically convenient. This has been true since governments first started coining money. Debasement of the currency isn’t a new phenomenon; it’s happened throughout history.

I put it this way in a tweet on election day ”On the subject of politicians, I'm Confucian - the upright man needs no law but his own, and the crooked man will follow no law but his own.” Financial shenanigans are a symptom of governmental shenanigans, not a cause. Fighting the symptoms is like fighting the tide. WE need more upright politicians, and less crooked ones.

Having a Gold Standard won’t stop the government from making free with the economy – it won’t even necessarily make it (much) harder – because the government sets the value of money by taxation ANYWAY. Especially in today’s economy – you could (conceivably) live by barter; but you have to pay the taxman in dollars.

And that brings us to another problem with a gold standard  (or any other commodity-backed currency, by the way) – it’s governmental price fixing. By governmental fiat, the weight of a $1 gold coin is $1 worth of gold. Less seignorage and the discount for official purity, anyway. You may have a black or grey market in gold where the cost of gold fluctuate, but again, you have to pay the taxman his cut by selling him gold at the price he sets. Therefore, he has an interest in stamping out those markets where gold sells above or below its fiat value.

With the un-backed currency we have now, there is no commodity where the price is fixed – the only thing that the government can fix the price of is … its own money. Which, granted, really sucks if your wealth is stored only in that currency. But it doesn’t have to be. It is within the means of even the most modest investor to purchase non-dollar-denominated assets and instruments. Such as, yes, gold. Or lead, brass, and powder. Land. Multinational stocks and bonds. &c.

What I don’t have is a solution for those people who have a fixed income denominated in dollars; particularly those who believed the promises of every government since FDR (arguably, since Bismarck). I wish I did – I don’t like to see people suffer. But I don’t see hard currency helping them out any more than any other zany scheme is likely to.


  1. ...the government sets the value of money by taxation ANYWAY. Especially in today’s economy – you could (conceivably) live by barter; but you have to pay the taxman in dollars...By governmental fiat, the weight of a $1 gold coin _is_ $1 worth of gold.

    I'm not sure I understand this argument: taxes are generally assessed as a percentage of income or other economic activity, not as a set number of dollars (and thus, in a gold standard, X grains of gold). If the value of gold fluctuates day to day, so will the value of a dollar, and thus the amount of tax in dollars, and thus the amount of tax in gold.

    To exaggerate, say the tax on a transaction is 10%, and that the "value" of gold is set at 100$ per one-ounce coin.

    If I buy a commodity for $1000 today, I'll pay ten gold Eagles and owe Uncle Sam one ounce of gold. If the price of gold spikes astronomically next month, and I buy the same commodity for a single $100 coin, I'll owe ten bucks in tax: a tenth of an ounce of gold.

    What am I missing here?

  2. The government, by issuing a one ounce gold coin with a "face" value of $100 has (more or less) set the price of gold to $100/oz. (The more or less ignores seignorage and a couple of other factors). If the "value" of an ounce of gold is NOT $100, we run into problems.

    Also, the concept of a tax being a percentage of an underlying activity is by no means the only taxing method - look at the cost of a tax stamp for a silencer, SBR, &c...

  3. Yes, but it seems like they've only "set the price" in a nominal and superficial way. The dollars-per-ounce may remain the same, but the actual value of the gold (the amount of goods and services it can be exchanged for) can fluctuate freely; the actual value of the dollar simply changes with it. As long as the overwhelming majority of taxes are assessed in percentages rather than in absolute numbers, I just don't see how government is influencing the value of gold in that scenario.

  4. You've just discovered inflation and deflation. Because gold is $100/oz, but the relative value of gold can fluctuate against other goods and services, those other goods and services diff in price, depending on their relative value of gold today. I have a post going up explaining why I believe *any* commodity-based currency is a Bad Idea; essentially because commodities *do* have intrinsic value.

  5. I'm aware of inflation and deflation. ;)

    As a crotchety libertarian, I'd just rather deal with week-to-week fluctuations in the value of money with the occasional scare than allow government to steadily erode the value of my money, and trust them not to go overboard and cause hyperinflation.

    I don't pretend to be sure a commodity system is workable in real life, but from my point of view, the fluctuating-value problem in particular is less of an issue than the problems we currently have with fiat money.

  6. Government eroded value of money even in the hard money era - I didn't include a link to Gresham's Law for grins and giggles.

    One thing I find useful in thinking about money is that a certain amount of it will buy x hours of labor of someone with Y skill level. In a lot of ways, that's what the USD is backed by, labor. You can see that almost everywhere, because, in the US, the cost of labor is one of the major inputs (if not the majority of the cost) of a finished product.

  7. I'm aware of catastrophic debasement of precious metal coinage from the ancient world through the Renaissance, but (and this is just off the top of my head before I have to run) I think it's been pretty rare in the modern world. At the very least, I'm pretty sure US coinage remained solid from the first coins we minted in the 18th century up until the replacement with base metals in 1964. Debasement of precious-metal coins is seen as immoral in a way that debasement of fiat money isn't for some reason, and I can't imagine a government getting away with it in the age of the internet.

  8. I dunno - the examples I've thought of for debasement of fiat money have pretty much universally been condemned, AND were at the time (weimar and Zimbabwe). The curren tgovernment is being roundly panned not for running the presses, but borrowing recklessly; something having hard money won't stop.

    Something that follows from my article about the sheer impossibility of going back on the gold standard; in a commodity-backed monetary envirnment, your economy can be no larger than your supply of the commodity. That would have been a real problem for us to have stayed on the gold standard, as we go into a labor/information-based economy, where wealth really can be created from nothing more than time and inspiration...

  9. I, for one, am in the camp of "let's get Government out of the money business altogether". I agree that backing money with gold won't help, if government has control of the money.

    Instead, I'd like us to set up a system where we trade in gold and silver, and anything else that anyone would like to try to pass off as "currency", and each are allowed to float relative to everything else.

    Theoretically, we could do this without government, but as you pointed out, a HUGE problem with this in the income tax. It annoys me that even barter is taxed.

  10. How do you calibrate value of a commodity without money? If we dropped every currency today and people used money denominated in X amount of Y material at Z% purity; what is the cost of a smartphone, much less the service contract? How many oz of .999 silver is an iTunes download, or an hour of my time?

    Money is a metric. Without money, you can't measure value. How long is a stick of wood in thumb lengths when the standard thumblength is undefined?

  11. If we are using commodities as money, we would calibrate value the in same way that we already do with dollars.

    For example, if I had some smartphones I wanted to sell, I would ask myself, "How much gold would I accept to give up a smartphone?" Then I would say to myself, "It took this much effort to make this device, and I want enough profit to feed my children, and to go to Europe this year, and I know that if I sell X smartphones for price Y, I'd be able to do that--but I also know that my competitor will sell his smartphones at price Z, so I better lower my price a bit--but my smartphone has features A, B, and C that my competitor doesn't have..." and, taking all these factors into consideration, and a bit more, I would settle on some sort of price, in ounces of gold.

    I would then repeat this with silver, because when silver isn't money, the price of silver won't be tied to the price of gold, and so I'd want to make sure that the price in silver is reasonable. In practice, this would be easy to do: I would just check out the trading rates between gold and silver for the day, and make adjustments accordingly.

    Of course, I could get the price wrong--if it's too low, I'll sell out too quickly, and if I set it too high, then I won't sell very many units. But this is a risk of pricing in general, and has nothing to do with the money we use.

    While it's true that money is a metric, it's not the only metric. Indeed, I could sell a TV for dollars, or pounds, or francs, or yen, or pesos--and if I wanted the same value across all of these things, I would just look at the exchange rate. I can, and people often do, set the price in tables, or in services (if you rake my leaves for a year, I'll give you a smartphone and a contract), or in TVs, or in bullets and guns, or anything else imaginable. The IRS knows that when you do this, you produce "income", so the IRS wants you to keep careful track of these things, so that they can tax it.

    (to be continued...sorry for the extra-long comment!)

  12. (...continued from previous comment)

    We can even print our own money, as was done in Salt Lake City, during the Great Depression, when deflation literally sucked Salt Lake dry of money. It facilitated trade between barbers, grocers, and so forth, so things didn't grind to a halt--but it was an imperfect solution, because you couldn't use Salt Lake dollars to pay your mortgage to that company in Omaha. They could have easily traded in bullets instead, and they would have worked just as well, and would have had the same problem.

    The funny thing about claiming that money is a metric, is that while it's true, it's also not good to compare it to thumb-lengths. The nice thing about thumb-lengths is that I could either use my own thumb, or just declare a given length before I start my project as "one thumb", and complete my project with consistency. Unfortunately, no monetary system has this attribute--every system is subject to inflation and deflation--and even if I traded only in smartphones, the "price" of smartphones, relative to anything else, is always being adjusted.

    I would also add that the only thing that keeps us from going to a private gold or silver standard is the widespread belief that we have to have money controlled by government. Well, that, and the myriads of laws over gold and silver would likely make trading in these even more impractical (which, historically, have been a good idea, for several reasons). And these are no small obstacles to overcome! But nothing (except perhaps complicated laws) really stands in the way of my local grocer from setting up his cash registers so that I could purchase my groceries with X ounces of gold, Y ounces of silver, or Z dollars--or even X pesos, Y francs, or Z dollars.

    Finally, if we traded in things where their value is allowed to float, we avoid the effects of Gresham's Law. This is why a gold-backed currency is a bad idea--we fix the price of a dollar to a fixed amount of gold--but imagine what would happen if we fixed our dollar to the price of the pound, and the value of one or the other dropped! By allowing the values of currencies relative to each other to float, we avoid the effects of Gresham's Law.

    For that matter, isn't Black Friday an attempt by merchants to take advantage of Gresham's Law, in order to sell things?

  13. I would have to confess that I just now got around to reading the article. It hasn't changed my mind a bit. I agree with the point that a government-controlled gold "standard" is just as bad as a government-controlled fiat system.

    But the article puts the blame of depressions and recessions almost solely on the monetary systems used. It ignores the effects of meddling with the economy, strengthening of unions (a big source of "sticky wages", by the way), prosecuting prominent businessmen, and increased burdensome regulations, which fluctuated often--all of which would have had devastating effects, regardless of monetary supply.

    Furthermore, Ludwig von Mises makes a very good case that it's forced low interest rates that are a cause of "bubbles" and recessions, more than anything else.

    And this is why I oppose government interference with the money supply, period.


Please keep it civil