United Liberty

Deep within the bowels of CPAC, in a small conference room on the second floor of the Marriott Wardman hotel, dozens of people packed inside to listen to a blue ribbon panel—or perhaps I should say “gold standard” panel, for that was what John Mueller of the Ethics and Public Policy Center, Jeffrey Bell of the American Principles Project, and James Grant—yes, that James Grant, author of Grant’s Interest Rate Observer and Ron Paul’s pick to head the Federal Reserve—were on hand to talk about and explain: a return to the gold standard. And yes, Grant—and many in the crowd—were wearing bowties.

Although I do wonder if the real reason people showed up were because of the Bavarian pretzels they were offering.

I have to admit, I came into the panel with a major question. I am totally for the abolition of fiat currency, the abolition of the Federal Reserve, and the restoration of a sound money policy. 2011 dollars are worth about 19 cents in 1971 dollars, the year when Nixon closed the gold window and took the country off the gold standard. It is, I argue, the necessary step before we can even look at getting rid of minimum wage, unemployment compensation, things that libertarians would want to remove, but we can’t because the money people are using isn’t worth anything. But is the gold standard really, well, the “gold standard” of monetary reform? Would going back to the sixties necessarily bring back prosperity? Were there any other alternatives?

James Grant immediately launched into the common objection of fiat supporters (“fiatists”?) who argue that the gold standard is anachronistic and not well suited for the complex 21st century. He argued it was especially suited for the 21st century, because this is the century of what he labels “collaborative social networks.” Oh yeah, we all thought, Friendster. I dig you. But that wasn’t what he was talking about at all; he said such things were really markets, and that the gold standard was a market where individuals and businesses would collaboratively determine the rate through normal market processes.

Yes, that’s right: Grant argued that the gold standard is the Facebook of currency. Or maybe the Twitter. Or Google+. I’m not sure which one puts the gold standard in the most glowing light. (What, you didn’t think I was a real journalist without biases, did you?)

Mueller of the Ethics and Public Policy Center then listen the three main consequences of going onto a fiat currency:

1. Loss of federal budget discipline
2. Chronic commodity inflation, deflation, and volatility
3. Decline of American international competitiveness

Mueller noted that every time we’ve gone on paper currency—during the Revolution, during the Civil War, and in the present day—there have been significant budget deficits. That’s certainly true: during the Revolution, the Continental Dollar was worthless, and all of the states had massive debts that were only alleviated when the new federal government took them up after the new Constitution. (I don’t really know the monetary history of the United States of roughly 1860-1870, unfortunately.) The logic makes sense: with paper currency, when you either directly or indirectly control the value of money itself, why worry about hitting any limits? Just inflate it away or borrow more of your money from others, tell them they’ll get a great deal. Isn’t that what we’ve been telling China for the past thirty years?

The commodity issue is also really important. Mish Shedlock wrote last year that Ben Bernanke, Chairman of the Federal Reserve, has blood on his hands—because Bernanke’s quantative easing had led to increasing speculation in commodities, which led to increased prices for food, energy, clothing…and had sparked the Arab Spring. Now while I think the Arab Spring is a good thing, it shouldn’t happen because some bald bureaucrat in the depths of the District of Columbia has been manipulating some random numbers in a spreadsheet to better reflect his vision of a planned economy.

Mueller didn’t say anything about the Arab Spring or Bernanke having blood on his hands, but he did say that every time there was a major expansion or contraction in the monetary supply, there was either massive inflation or deflation in commodities. That’s an extremely dangerous thing, since if someone screws up with the spreadsheet and puts in, say, an extra zero (hey, it could happen), we could be looking at far more expensive, well, everything. And you wonder why we think giving such power to the government is a bad thing…

But then there was my question, my major concern, and that was: what happens if the economy grows and expands, but the world supply of gold remained flat? Would that be a good thing or a bad thing? Fortunately, someone else asked that question, because I had a chunk of pretzel wedged in my throat and had run out of Pepsi. Unsurprisingly, they didn’t directly answer what would happen in that scenario (or they did and I somehow missed it, which is possible. I miss things said in front of me all the time. Usually when they’re said by my mother.)

What Grant did say though—and which I didn’t actually know—is that world gold production increase the supply of gold about 1.8% each year. That’s why monetary planners try to hit 2% inflation each year (or at least, maybe its a reason.) And when that gold is extracted, it stays—you don’t just destroy gold, it gets reused and reused and reused. Grant said that there were people in the room who had Cleopatra’s bangle in their mouths (eww.)

Furthermore, although he did not actually use the words, he did say that the current system was a perfect example of “crony capitalism,” an “unholy alliance” (he did use those) of Washington and New York. And that one is completely true: the Federal Reserve, while having its chair selected by the United States government, is actually owned through shares by some of the biggest banks in the world: J.P. Morgan, Citibank, Bank of America, Deustche Bank, and others. If that’s not crony capitalism I don’t know what is. Now if our monetary system—the very foundation of our economy—is inherently cronyistic, then how can we say we have a “free” market in the United States?

Of course, being an educational panel, it had free literature—and what bibliophile like myself can pass up free literature? One book, which you can download for free, had a handy appendix outlining ten myths about the gold standard. Wouldn’t going back to the gold standard led to a fall in prices? Well, according to this book, that was because the government tried to go back to the old parity of $35 an ounce, and the authors and panelists are instead arguing for the market to determine the price. Wouldn’t a large discovery of gold rapidly lead to massive inflation? Unlikely, they say; and the last time it happened, during the 1849 gold rush, prices increased 12.4% over eight years—or about 1.5% a year. That’s pretty stable.

So perhaps it would work. I still need to do more research before being 100% convinced of the gold standard itself, but what do you think? Gold standard? Some alternative? Or (heaven forbid) fiat currency? Let us know in the comments.