11.02.12

Tarnished gold standard

Posted in Liberty at 17:05 by RjZ

I think it’s great that politicians this year were talking about the gold standard. The gold standard is a pretty esoteric thing for a politician to bring up at a rally and expect anyone to even know what he’s talking about, let alone cheer him on. Unfortunately, I am not so convinced that people really do have an idea what impact reverting to the gold standard would have.

Since the libertarian party is generally for policies that return us to the this ultimate standard of fiscal conservatism, and I hope we’ll continue to hear more about it in the coming years, I’d like to share my non-economist views on just why returning to the gold standard is the kind of utterly non-pragmatic thing that libertarians need to stop screaming about if they ever expect to gain a foothold in U.S. politics.

Briefly, then, here’s how it works. If you’re on the gold standard, than, no matter what happens in your country, no matter what banks do with exotic, leveraged, financial instruments, you can’t ever print any money, unless, of course, you have gold in your treasury to back it up.

Right from the start, it’s silly, to imagine an actual gold standard. We’ve already printed so much money since we left the standard completely (in 1971!). The U.S. would have to so dramatically de-value its currency until it could justify each dollar’s percentage of gold in our treasuries; we’d have to rewrite decades of inflation all at once. Whatever you may have in the bank, would suddenly be nearly worthless, and your ability to buy foreign goods and services would fall through the floor.

Of course, we don’t have to return to the hard limit of gold in our coffers. Instead, we could simply not print any more and call the current amount of cash in our economy a hard limit.

All this is probably sounding pretty reasonable to my fiscally conservative readers. Rest assured, dear readers, I’m with you, but alas, the economy is more complex than we would like it to be. I get it. We libertarians don’t really trust our elected officials. We don’t want them to have any leeway to bail out parts of our economy by just printing money–what they’re really doing is borrowing against the future, and, alas, there is so little incentive for them not to do this.

And I agree with all this. The only practical problem is that, the ability to occasionally print money enables governments to at least soften the blow of a great many ills of our capitalist system. It’s commonly agreed that the Great Depression was made worse because we couldn’t print money. Please note, I am not ascribing to the Gold Standard causeing the Great Depression; over spending did. I am claiming that the inability to respond extended the impact. There was nothing the government could do to lessen the blow of failing banks which reduced trade an economic efficiency.

I disagree with the magnitude of the more recent bail-outs and how they were used during our current crisis, but I can’t deny that the Federal Reserve’s policy of “quantitative easing” (also known as QE, a new, fancy way to print money by simply adding it electronically to bank balance sheets) has eased the pain that this crisis would otherwise have caused.

Was it the government’s fault that they didn’t foresee the amount of leveraging that both banks and individuals had engaged in? Should they have passed laws to avoid this? Would a sensible libertarian policy suggest we ought to try to guess all the ways in which we can get screwed by people trying to game the system and pass laws to avoid it? Hardly.

We have borrowed from the future, because unexpected things happened in the past. Like abortions, this ability to print money should be safe, legal, and above all, rare. The alternative is a tossing and turning economy, now wildly up, now wildly down, with longer time spent in the painful doldrums, and politicians with no tools whatsoever to do anything about it. Do I trust politicians with this freedom to print money? Not much. But I know for sure what happens if there is no alternative.

Can you imagine a business trying to grow without any ability to borrow? Now scale that up to the size of a country. Argentina is a country which went bankrupt. They screwed creditors and are now unable to borrow for the future. The result is a country with resources and educated people struggling to get out of doldrums and no recourse to get there. Unlike the U.S., when they print money, no one actually believes them.

In fact, the U.S. can’t actually print money arbitrarily. We can only keep adding zeros to balance sheets as long as the rest of the world is willing to value our currency. During the recent financial crisis we’ve had three rounds of QE and billions and billions of dollars are added to our financial system (without us earning them!). The dollar, meanwhile, has held its own on international markets. Why? Because other countries are worse off than we are (for example, the Euro crisis), and, unlike Argentina, the financial markets still believe America is a good bet. When the U.S. was downgraded by the rating industries, financial markets barely reacted. Why? Same reason; we don’t have to be such a good bet, so long as we’re better than everyone else.

Returning to the gold standard needlessly removes a critical tool from our government’s ability to manage unforeseen problems with our modern capitalistic economy. Fortunately, we really can’t just print money arbitrarily, and without consequence, and the impact of such forced restraint would leave no way of reacting to more serious problems. If libertarians truly want to allow unfettered capitalism to explore all the ways in which we can enable everyone to reap benefits from our resources, we can’t afford to watch the world pass us by while we languish in our next recession or depression with no lifesaver in sight, just because of our distrust of politicians. There are better policies for libertarians to build their platform on, even if it is exciting to wonks and economists that everyday people are actually discussing such nuances of our economic system.

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