Joe Weisenthal over at Business Insider is no friend of gold.Â He frequently pulls a Keynes and attacks the precious metal as a “barbarous relic” while accusing proponents of the gold standard as cranks.Â In a recent post praising Federal Reserve chairman Ben Bernanke and a lecture he gave to students at American University over the origins of central bank, Weisenthal really let’s gold have it.Â I will address the simple criticisms in order.
To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It’s nonsensical.
Being that all consumer goods, when traced back completely, come from the mixture of land and labor, attacking gold for having the same origins as any other good in existence is pretty embarrassing.Â It’s akin to saying Hitler was a despicable human being because his mother gave birth to him.Â But of course Weisenthal misses the point that the time and capital intensive process of mining and minting gold is a redeeming quality rather than a downfall.Â Gold was supposed to serve as a check on continual money printing by central banks and prevent the type of cronyism prevalent in cartelized banking.Â Â Money, either government fiat or gold based, is not neutral and effects the first receivers positively as it enters the economy and distorts relative prices.Â Those who benefit financially from legal tender laws and government imposed monopolies over currency creation end up being the politically favored banker class.Â This is why central banks are often the creation of elite bankers; the Federal Reserve is no different.Â The current author is still waiting for pro-central bank types to rectify their devotion to the fascist nature which is a dominating feature of all central banking systems.Â Perhaps Weisenthal has a framed picture of Mussolini in his office.
The gold standard ends up linking everyone’s currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they’ve fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.
It creates deflation, as William Jennings Bryan noted. The meaning of the “cross of gold” speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.
The Greenbackers and later the pro-silver, inflationist, Bryanite Populist Party were not “agrarian parties”; they were collections of pietists aiming to stamp out personal and political sin.
The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.
The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).
Moreover, the postâ€“Civil War panics in the United States were due in large part to the unit-banking regulations in many states that forbade branch banking of any sort. Confined to a single office, each bank was necessarily fragile and undiversified. Canada experienced none of these panics even though it did not establish a central bank…until 1934.
The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there’s a hint of another priority (like falling unemployment) it all falls apart.
Gold standards leave central banks open to speculative runs, since they usually don’t hold all the gold.