by John Butler, GoldMoney:
In the spirit of the holidays and hope for a more prosperous 2017 I thought Insight readers might appreciate a little holiday humor. So please don’t take this edition too seriously. But if you happen to stumble across a ‘paperbug’ or two over the holidays, perhaps you could share some of the points made here as it will help them to realize just how hopelessly misguided they are. Cheers!
NUMBER 10: THERE IS NOT ENOUGH GOLD (OR SILVER) IN THE WORLD TO SERVE AS MONEY
Let’s begin with the obvious. We know that central banks the world over have printed money at exponentially growing rates for years. There is now so much paper and electronic money floating around the world that gold (or silver) cannot possibly be expected to keep up. You can’t print gold, after all, you need to find it, dig it out of the ground, refine it, etc, a hugely expensive and time-consuming process which practically ensures a stable rather than exponentially growing supply of the stuff. Of course, we know that an exponentially growing supply of money is a good thing. How else can an economy hope to grow, especially one bearing an exponentially rising debt burden! We need all that new money to pay all that new interest, don’t we? And don’t forget, most things keep getting more expensive, like food and fuel. Don’t we need more money to pay for all that too? What about government entitlements that keep growing in size? If we didn’t have a constant flow of new money, how on earth would we pay for all of that? It is essential that we keep the printing presses rolling.
NUMBER 9: GOLD AND SILVER ARE OLD-FASHIONED, CUMBERSOME MONEY
Here’s another obvious one for you: Gold is HEAVY! Who wants to carry gold coins around? They might be nice and shiny, but to me, gold looks even prettier around a lady’s neck or wrist. The more you think about it, in an age of electronic, plastic, internet or blockchain money, the whole concept of coinage begins to seem a bit anachronistic. Who even uses small denomination coins anymore, except as household poker betting tokens? I suppose larger coins are still of some use, but let’s face it folks, even those are almost worthless anymore. Coinage is just so passé. Sure, coins used to have some value. When I was young and I watched Little House on the Prairie and The Waltons I was amazed that at the general stores or other retail establishments a penny actually bought a range of items and with a few nickels and dimes you could purchase much of what was on offer! But why bother with coins today? I use plastic or electronic money for almost everything. Sure, that money still references dollars, or euros, or sterling, or yen balances of a bank account. But hey, it would be just so barbaric to reference a gold or silver account instead, wouldn’t it? As if banks even hold enough cash on hand for large withdrawals anymore, much less gold or silver. Oh and an ounce of gold, at a whopping $1,150 is just way too expensive for most commerce. So not only is there NOT ENOUGH gold in the world as per Number 10 above; what gold there is, is TOO EXPENSIVE to serve as a useful money! Oh I suppose we could use fractions of ounces of gold instead of full ounces, but most people struggle with fractions, including me. Silver might be more useful, but at some $16/oz, it wouldn’t really work for making change now, would it?
NUMBER 8: GOLD RESTRAINS GROWTH
OK, this reason is a little bit wonkish, but if you’ll bear with me I’ll explain why gold-backed money would put the brakes on the healthy growth the world has been experiencing all through this prosperous modern period of an exponentially rising money supply and might even send us back to the poor house. We already touched on this with Number 10 but let’s go off on a tangent here. You see, back when gold was money, people were poorer. Way poorer. And economic growth was often much weaker. I mean, before the industrial revolution, we didn’t even have machines to do basic work like farming, so people had to have loads of children just to get basic work done, resulting in a cycle of poverty. Sure, a handful of landed aristocrats held most of the wealth, and they did just fine, but really, do we want to go back to that sort of wealth disparity?
Oh and as for the industrial revolution, it was such a fluke. Sure it led to the most rapid economic growth in history in most of Europe, North America and Japan, but it would probably have been way more rapid had money growth been exponential instead of stable at the time. That said, inflation didn’t actually work out so well in France, where exponential money growth destroyed much of the economy in the late 18th and early 19th centuries. But hey, how else to finance that Revolution of theirs? The American Revolution was also hugely inflationary, you know, those worthless continentals and all. But wasn’t it a huge overreaction for the US federal government to choose silver coinage as the inaugural US federal money?
For that matter, had Napoleon just kept on inflating, rather than paying his soldiers in silver coin to earn their confidence and loyalty, he might have won the wars against those Brits and others who refused to inflate their currencies. And why did the Americans experiment with gold- and silver-backed money for so long? Imagine how much faster they would have industrialized had they just kept on printing continentals instead! Ah well, hindsight is 20:20. Perhaps technology wouldn’t exactly regress if we went back to gold- or silver-backed money but you never know. Some people talk like that. And certainly most of the innovations of modern times would never have taken place had we been on gold-backed money. Think about all those green technologies that promise to solve our energy problems someday. Things were just fine before we started consuming all the carbon stuff and now we’ve got to get back on track. Only exponentially growing money can fund these programs that aren’t yet profitable. Imagine what would happen if money were gold? Or silver? We would be dependent on energy and other technologies that actually made fundamental economic sense. No, that would be a huge mistake.
NUMBER 7: THE GOLD STANDARD CAUSED THE GREAT DEPRESSION
This is related to the above but hugely important in its own right so I’m treating it as a separate critique of gold- or silver-backed money. Milton Friedman is famous in part for blaming the Federal Reserve for causing the Great Depression. This runs contrary to what many believe, however, that the gold standard itself caused the Depression. Of course, they are right. Let me show you why by way of a little historical background. We all know that WWI was hugely inflationary as Britain, Germany and other belligerents went off the gold standard in order to finance the war by printing money. Following years of printing, in Europe prices for just about everything skyrocketed.
It didn’t help, of course, that much industrial capacity was destroyed by the war, limiting supply. In Russia, most of the capital stock was seized by the government as part of their anti-capitalist revolution. So there was loads more money chasing far fewer goods in Europe, which is one way Milton Friedman and other so-called ‘monetarists’ like to explain inflation. In some places like Weimar Germany, interwar Austria and Hungary, there was outright hyperinflation and currency collapse in the 1920s.
Impoverished, these countries ended up with highly competitive labor costs, similar to various poor emerging markets today. Britain, however, had gone back on the gold standard in 1925 and thus had the strongest currency in Europe. This made British labor highly uncompetitive, resulting in persistently high unemployment and massive strikes, some turning violent. In 1927, the Bank of England kindly requested that the US Federal Reserve stimulate demand for UK exports by expanding the US money supply. The Fed obliged. This contributed to a huge stock market bubble in the US, but unfortunately it crashed under its own weight in 1929. Meanwhile, Britain’s economy remained mired in a depression unknown to most Americans today. Finally, in 1931, Britain decided to devalue its currency. The US was already slipping into depression at the time and suddenly found it had by far the least competitive wages in the world. It was now in a situation comparable to Britain in 1927, yet without another country to which it could turn for help.
The Federal Reserve had already accumulated a huge amount of gold from Britain but, as Milton Friedman observed, didn’t do as it was supposed to do and expand the domestic money supply in line with the swelling gold reserves. Why? No one knows. Perhaps the Fed was spooked by the stock market boom and bust that it had created in 1927-29 and didn’t want to risk a repeat. But whereas the 1927 monetary expansion was not linked to an inflow of gold reserves, in 1930-31 the Fed could have hugely expanded the money supply in line with growing gold reserves, thereby preventing many bank failures. To make matters worse, President Hoover was advised by some prominent, proto-Keynesian economists of the day that a drop in aggregate demand had to be avoided at all costs and that the best way to accomplish this was to support wages, notwithstanding rising unemployment. As a result, US wages were by far the highest in the world by 1931, labor was uncompetitive, and unemployment was thus far higher than it would otherwise have been, had Hoover left things alone.
So, it is blindingly obvious that the gold standard was the cause of the Great Depression. Not WWI. Not the massive inflation to pay for WWI. Not the widespread destruction of European industry. Not the Russian Revolution and industrial collapse. Not the 1920s hyperinflations and revolutions in central Europe. Not the Fed’s stock market bubble of 1927- 29. Not the Fed’s failure to allow the money supply to expand naturally with gold reserves in 1930-31. Not the artificial wage supports introduced by President Hoover and continued by FDR. No, the gold standard caused the Great Depression. Really. It did.
NUMBER 6: RULES CAN BE BROKEN
Returning to the obvious, this reason is so simple a child can understand it. Rules are nice on paper but we all know they can be broken. Just because a country is on a gold standard doesn’t mean it can’t just devalue and leave. Britain and Germany did so in 1914 and inflated like crazy to pay for WWI as explained above. The US devalued the dollar some 60% versus gold in 1934 and left the gold standard entirely in 1971. Let’s face it, if rules can be broken, what’s the point having them in the first place? The claim that gold or silver money is stable and prevents runaway inflation is just hogwash. Whenever governments choose, they can ditch gold money, devalue and create as much inflation as they desire. They can even hyperinflate if they like. What’s to stop them? They set the rules. Gold advocates are just so naïve!
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