Gold and Ideology

Our politics have reached an ideological pitch more strident than any I can remember.   Perhaps bad economic times encourage the gravitation toward extreme ideological positions.  Sensing the shift in public mood, politicians respond by adopting and espousing those rigid ideological positions themselves.  These musings are triggered, in part, by the ongoing debate over the budget and raising the debt ceiling, but that is not what I want to comment on.  Rather, it is how ideology has started to drive the debate over monetary policy.

As in the budget debate, most of the ideological fervor about monetary policy seems to be on the right.  The Fed stands accused by James Grant in the weekend Wall Street Journal of “flooding the system with dollar bills;” it is also held responsible for devaluing the dollar, fuelling inflation, and creating commodity and asset bubbles, all while failing abjectly to produce the recovery that all that money printing was supposed to have produced.   General anti-Fed sentiment and resentment over its monetary policy have been catalysts for reviving interest in and support for the gold standard.  The gold standard has become the ideological fad du jour.

But do supporters of the gold standard understand what it is that they are supporting?  Do they have any idea what it would it mean for the dollar to go back on a gold standard and how would it be implemented?

Many, perhaps most, people who say that they support going back on a gold standard think that a gold standard means that every dollar has to be “backed” by a specified amount of gold reserves for each dollar.  But gold “backing” (i.e., the holding of a fixed quantity of gold per dollar) does not establish a gold standard, and it would be entirely possible  to go back on the gold standard with no, or almost no, gold backing in the sense of a fixed quantity of gold reserves held per dollar.  Holding gold reserves for each dollar would mean only that to print more dollars the US would have to go out and buy gold to “back” the extra dollars.  That would not pin down the value of the dollar, it would merely transfer some or all of the profit that the US Treasury earns from creating dollars (seignorage) to the owners of gold.  So you can see why owners of gold would be charmed by the prospect of increasing the gold “backing” of dollars.  Having to share its profit from creating dollars with owners of gold would certainly reduce the Treasury’s incentive to create more dollars, but the value of the dollar would not be linked directly to the value of gold.  Only convertibility of the dollar into gold at a fixed exchange rate that can do that.

As I understand a gold standard, and I believe that my understanding accords with that of most monetary theorists who understand how the gold standard worked, a sufficient condition for a gold standard to be  in operation is that the  issuer promises to redeem the currency at a fixed, unchangeable, exchange rate between the currency and gold.  The higher the fixed gold price is set, the less valuable is a unit currency in relation to gold.   But that is just a nominal value, the real value of the currency is the real value of the corresponding amount of gold.

This past Friday, the value of gold rose to almost $1600 an ounce.  If the US established a gold standard tomorrow at a fixed rate of $1600 an ounce, making $1 the equivalent of one-sixteen-hundredth of an ounce of gold.  What would that do to the value of the dollar?  Well, the value of a dollar would have to equal the value of one-sixteen hundredth of an ounce of gold.  But what would that value be?  It would depend on the demand for gold in relation to the supply.  There is a huge stock of gold sitting in bank vaults and other treasure houses throughout the world, and hardly anyone has a good handle on what that supply is.  But the available supply surely dwarfs both current production and the current demand for gold in industrial and ornamental uses.  So the current value of gold is almost entirely dependent on the demand to hold gold by people who have no use for it except to keep it locked up in a vault.  Does that fact make anyone feel confident that the value of gold in the future is likely to be stable?

Or look at it another way.  Supporters of the gold standard like to point out that since creation of the Fed in 1913 the dollar has lost 95% of its value.  Well in 1913, the dollar was convertible into an ounce of gold at $20.86 an ounce.  So while the dollar has lost 95 percent of its value, gold has appreciated even more rapidly than the dollar has depreciated.  If gold had kept its value in 1913, its value today would be somewhere between $400 and $500 an ounce.  Accept for argument’s sake the claim of supporters of the gold standard that the recent run up in the value of gold was caused by a loss of confidence in the dollar.  Would it not be reasonable to conclude from that assumption that if the dollar were made convertible into gold, people would then start selling off their gold, the threat of dollar depreciation having been eliminated?

But wait.  If people started selling off their gold, the value of gold would decline.  If the real value of the gold fell from its current value back to its value in 1913 when the dollar was convertible into gold at $20.86, the value of would lose two-thirds to three-quarters of its value.  We are talking about two or three hundred percent inflation.  Does that make you feel more confident about the value of your savings?

James Grant, in a recent interview  by Larry Kudlow, another advocate of restoring the gold standard, made the following point.

Our monetary policy today is dependent upon the judgment of a clique of monetary policy Mandarins, whose judgment is sometimes right but more often wrong because they are, after all, mortal people. So the gold standard has been billed as something antediluvian, and the idea of returning to it, or moving forward to it, is typically characterized as something quixotic, but on the contrary, it seems to me, this is the most eminently practical step we could begin to discuss. We must begin to discuss it.

Mr. Grant, a very intelligent, practical, and insightful analyst of business and financial affairs, seems somehow oblivious to the fact that the gold standard never managed itself; in its classical period from 1870 till World War I it was  under the constant management of the Bank of England with the occasional assistance of the Bank of France and other major banking institutions.  As gold reserves accumulated rapidly in the late nineteenth century and early twentieth century, managing the level of gold reserves held by the central banks to preserve a reasonably stable equilibrium in the world gold market became an increasingly challenging task requiring  the full attention of the Mandarins who managed the gold standard in the days of its greatest glory. 

Samuel Johnson called a second marriage the triumph of hope over experience.  For Mr. Grant now to imagine that we could simply go back on the gold standard for a third time and enjoy the blessings of a stable currency with no risk of inflation or deflation and with no necessity for intelligent technocratic management is truly a stunning triumph of ideology over experience. 

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28 Responses to “Gold and Ideology”


  1. 1 Lars Christensen July 18, 2011 at 12:12 pm

    David, I completely agree. I do not understand the fascination with the gold standard among some US right-wingers. Any attempt to go back to gold as monetary standard would have catastrophic consequences not only for the US, but for the entire global financial system. This is certainly not an endorsement of the present monetary policy in the US or other places however the call for re-establishing the gold standard surely is not good economics.

    Despite the fact that the call to re-establish the gold standard is misguided it nonetheless represent a legitimate dissatisfaction with US monetary policy and the general monetary policy set-up. Therefore, it is more important than ever to discuss what monetary policy regimes should be put in place instead of the present regime. I my view forms of Free Banking could be a solution, but until that (utopian?) regime is implemented other rule based regimes should be considered.

  2. 2 Juan Guy July 18, 2011 at 12:17 pm

    I don’t beleive Mr. Grant thinks that a gold standard would remove the threat of inflation/deflation [history shows that these can exist even in a gold standard].
    Further, I think History also shows that these same technocrats who managed the gold standard during the great depression were those that brought the worst of the depression on their countries. Perhaps the lesson then is that the management of money supply in any system is fundamentally unsound so long as humans have any discretion over it’s workings.

  3. 3 gabe July 18, 2011 at 2:09 pm

    It is easier to burn a strawman than it is too defend the current monetary system.

  4. 4 David Glasner July 18, 2011 at 5:03 pm

    Lars, Having written a book on free banking, I am glad to hear that there are still people out there who think that the idea has merit. But it will never be adopted in any form until we get a better sense of the legal framework within which entities creating deposits and notes circulating as money may operate. In my book I only touched on that issue and it requires much deeper thought than I gave it then or since. In particular, what restrictions should we put on the activities other than creating deposits and banknotes of such entities. I am now much more sympathetic to the idea of narrow banking than I was when I wrote my book.

    Juan, You are probably right that Mr. Grant who is a very smart fellow must realize that the gold standard would be subject to substantial fluctuations in the price level. But if so, in making his rather extravagant case for the gold standard, he should be a little more willing to acknowledge the potential downsides of the system that he is advocating. If you are referring to the technocrats who ran the system in the 1920s, Benjamin Strong, President of the New York Federal Reserve Bank was the greatest of them all. Had he not taken ill and dies prematurely in 1928, the subsequent history of Western Civilization might have turned out a lot more pleasantly than it did.

    Gabe, It certainly is easier. But why do you assume that I mean to defend the current monetary system?

  5. 5 Benjamin Cole July 18, 2011 at 6:04 pm

    Excellent blog. The gold nuts are having a field day.

    The partisan fault lines are burning red hot right now–one cannot use examples from USA history to convince anyone of anything.

    Thus, I contend the pro-QE crowd, pro-target NGDP crowd, must keep Japan as topic No. 1.

    To call the Bank of Japan” ineffectual, feeble and weak” does not raise hackles here. Indeed, it may even feed a little bit in the US hubris.

    I advise you talk a lot about Japan, and how asset values there have fallen for 20 years (your stock market portfolio may shrink for 20 years in a row!), and that deflation has not resulted in growth there.

    The strong yen has choked japan.

  6. 6 David Glasner July 18, 2011 at 9:26 pm

    Benjamin, Thanks. You are right the Japanese experience is very important. I think that their big mistake was when they allowed the yen to appreciate in the mid 1990s against the dollar which, I think, is what triggered their deflation. But I have not really read enough about what happened in Japan to be sure if I have it right.

  7. 7 Benjamin Cole July 18, 2011 at 10:38 pm

    David-

    Interestingly enough, Japan tried some serious QE 2003-2006, and John Taylor pronounced it a success, and gushed about it. Then they stopped, and Japan went back in perma-deflation-recession.

    Now, Taylor says no QE for the USA–an example, I suspect, of bitter partisanship in action.

    You can find Taylor’s fawning over Japan’s QE on his website, in papers published in 2006, “Lessons from the Recovery from the ‘Lost Decade’ in Japan: The Case of the Great Intervention and Money Injection,” Background paper for the International Conference of the Economic and Social Research Institute Cabinet Office, Government of Japan, September 2006 pdf

    I have been advising the pro-QE and NGDP crowd to talk Japan.

    Currently, the right-wing has conflated QE with endless deficits and runaway entitlements, and weak Democratic policies, while the left-wing thinks monetarism is the refuge of those who hate poor people. You can piss into muddied waters, or cast pearls before swine….

    I suspect QE and paying less interest on reserves and NGDP is the way out of our current trap. But we musty use Japan as the example of what not to do.

  8. 8 David Glasner July 18, 2011 at 11:12 pm

    Benjamin, You are not the only one to have noted the shift in Taylor’s views. When I started writing this post last night, I was planning to make a comment to the effect that the growing popularity of gold standard ideology in right-wing circles has pressured the Monetarists to become more stridently critical of the Fed or face a further erosion of their influence on and access to their right-wing patrons. But that is pure speculation on my part. I will keep your advice about Japan in mind as I think about what to comment on in the future. Thanks.

  9. 9 Lars Christensen July 19, 2011 at 1:15 am

    Ben, I completely agree – it is odd to see economists that have supported QE in the Japanese case is so much against it for the US. I have especially noted the views of Alan Meltzer, Anna Schwartz and Bennett McCallum. I am more ”relaxed” about John Taylor’s view – after all I never saw Taylor as a monetarist, but rather as pro-market New Keynesian like Mankiw. Monetarist analysis would lead you to support QE in my view, New Keynesian analysis would not necessarily lead to the same conclusion. Needless to say I think (proper) monetarist analysis (Hetzel & Sumner etc.) is right.

    That said, I have a lot of understanding for those traditional monetarists who are sceptical about QE as QE in its present form as two major flaws. First, it is completely ad hoc and as such seems like activist policy rather based on a clear rule. Second, Bernanke’s version of QE is high focused on credit markets rather on expanding the money supply.

    To win over the traditional analysts I think these two issues need to be resolved – particularly the ad hoc nature of QE.

    And then finally just an idea that comes to mind. Why not listen a bit to the gold party and try a new version of Ivring Fisher’s commodity dollar standard? Or rather lets combine Fisher and Sumner: Link the dollar to gold as an instrument to ensure a certain path for NGDP. Announce tomorrow that every quarter USD/gold price will be adjusted so to NGDP returns to its “old” path level in lets say 2014 and thereafter the USD will be linked to gold price to ensure a certain growth path in NGDP (at 0,3 or 5%). Just an idea…

  10. 10 Benjamin Cole July 19, 2011 at 1:20 pm

    Lars-
    Well, although I took a lot of econ in college, and was a financial journalist for 20 years, sometimes the argument gets over my head, and you just did.
    I have to say, the idea that steady prices are a good in their own right is not one I subscribe to. (As an aside, with core CPI rising at 1.6 percent now, and with a meter that may overstate inflation, we may actually have steady prices right now. Doesn’t it feel great?)
    I would rather live in an economy with 4 percent inflation and 4 percent real growth than 1 percent/1 percent.
    Within reason, real growth should be the goal of economic policy, with steady inflation a somewhat distant second.
    In Japan we have seen the results of low inflation fetishes. Just what is the virtue of zero inflation (if inflation can even be properly measured at such low levels)?
    In general, the USA prospered through the 1980, 90s, and 2000-2007 with moderate inflation. Why are we talking about the gold standard now?

  11. 11 Lars Christensen July 19, 2011 at 4:00 pm

    Ben, it is a way excellent to keep it technical to avoid having journalists quoting you;-)

    What I was arguing was not in favour of the gold standard. Rather I say IF somebody wants to find a role for gold prices in money policy then it can be used as a monetary policy INSTRUMENT. Hence, my (indirect) suggestion was that the Fed announce that the dollar will be depreciated against gold by a certain rate every quarter to ensure that NGDP returns to it’s pre-crisis path and thereafter to set a path for USD/gold to ensure growth of NGDP around for example 5%. This is not my preferred monetary regime or use of instrument, but it could work as a method of implementing NGDP level targeting via the FX and gold market.

  12. 12 Dustin July 19, 2011 at 4:04 pm

    I find the Sumner/Fisher combination to be somewhat intriguing.

  13. 13 Lars Christensen July 19, 2011 at 4:55 pm

    Dustin, so do I;-)

    Basically I think there is one major problem with blogging quasi monetarists and that is that they have very little to say about what instruments should be used to ensure a certain NGDP targets. It seems like especially Scott Sumner is arguing that it is simply if enough to just state a certain target and then expectations will take care of the rest. This argument has a lot going for it, but there is no major problem. How does the target become credible without staying how it will be achieved?

    As we know Sumner another quasi monetarists (I hate that term…) share monetarists dislike of using interest rates as an instrument, but they also say that the money demand function is less stable than traditional monetarists are arguing. That mean that they also would not be in favour money supply targeting – and I would agree that it would not make much sense to use money supply targeting as a response to the present situation where velocity is depressed. Obviously we know that Sumner’s is in favour of targeting TIPS inflation expectations – and I love this idea because monetary policy would become truly endogenous and as such completely rule based and it would work even if the money demand function is unstable and there would never be liquidity trap problem. However, reading Sumner’s view it seems like he is putting less and less attention on the instruments and rather “just” argue for another target than inflation targeting. I have great sympathy for Sumner’s views and analysis, but I doubt it will win in the end if the instrument question is no more directly addressed. And again it is not enough just to stay the targeting – the Fed prior implicit inflation targeting lost all its credibility when crisis hit in 2008 – probably because the instrument being used for decades was interest rates and the market realised the zero bound would fast be hit.

    I have other places argued in favour of a variation of Fisher and Sumner rules – one being an instrument and another being a target. This of course also is in line with some of the arguments made by Bennett McCallum in regard to Singaporean monetary policy regime with McCallum argues is a form of FX based NGDP growth targeting. So for the sake of it call it the Fisher-Sumner-McCallum rule: The central bank will every quarter announce an update path for FX appreciation/depreciation (against a basket of currencies or commodities) that will ensure that NGDP returns (or stay on) a given path within the next 24 months. If NGDP is “too low” then a faster depreciation quarterly rate will be announced and similar if NGDP is too high (compared to the preannounced NGDP path) then a faster appreciation rate will be announced. Sumner rightly would of course tell us that the FX forward markets fast would realise all this things and very little actual actions would be needed from the central bank to do the trick…

    I guess I should just start writing a paper on this…

    PS Sorry David for spaming your blog with internal quasi monetarist discussions;-)

  14. 14 Lars Christensen July 20, 2011 at 12:18 am

    And here you will see more on the connection between Sumner and Fisher (and Warren): http://www.themoneyillusion.com/?p=308

  15. 15 David Glasner July 20, 2011 at 11:56 am

    Lars, I would be interested in hearing the basis for your classification of Taylor as New Keynesian and Meltzer, Schwartz, and McCallum as Monetarists. I don’t disagree (or agree, though obviously Meltzer and Schwartz could not possibly be categorized otherwise) but why is Taylor NK and McCallum M?

    Benjamin, I used to think that price stability was a sufficient condition for steady growth, or at least as steady as it is within the capacity of policy to achieve. I now am inclined to believe that we should allow inflation to fall or even go negative in periods of rapid economic growth and allow inflation to increase in recessions. There are two ways of achieving this result. One is to aim at stabilizing wages (or perhaps if that is too difficult limiting the rate of increase to 1 or 2 percent a year). This was the recommendation of Hawtrey and believe it or not Keynes toward the end of the General Theory. The other is to aim for a steady rate of increase in NGDP, as Scott Sumner advocates, though, as he acknowledges, the idea is really just a slight variation on Hayek’s proposal for stabilizing money income.

    Lars II, You provided me with a lot of useful information. You can spam away as much as want. I look forward to reading your paper on all this.

  16. 16 Lars Christensen July 20, 2011 at 12:57 pm

    David, thanks for allowing the monetarist spam;-)

    As you say it is obvious with Meltzer and Schwartz. They are both monetarists and they both clearly among my favourite economists and economic historians. However, I most also say that I think that both of them have greatly misread the present crisis because they have applied some style of quasi Austrian analysis to it.

    In terms of Taylor I think he has been pretty loyal to his New Keynesian model, but I would also argue that we did not hear a lot of warnings about monetary policy being to loose from him in the ”boom years”. Neither did he warn about euroland problems BEFORE the crisis.

    In terms of McCallum – what can I say? I love to read everything he writes. He is extremely open minded (much more than I am….), but the reason I put him in the monetarist camp is that he seems to have an understanding of money – unlike Taylor who is trapped in the “interest rate camp”. And of course the McCallum rule is based on money base “manipulation” rather than interest rate tricks. But yes, he is very open minded and think his fundamental method of testing monetary policy rules against different macro models is very fruitful. Again he is one of my favourite economists and I try to read everything he writes. As somebody who is specialised in Emerging Markets his reading on for example Asia monetary policy regimes have given me a lot of inside…so lets just paraphrase Friedman: There is no such thing as monetarist economics there is only good and bad economics. McCallum in my view is 98% good economics even though I have been disappointed with some of his somewhat “partisan” analysis on recent US monetary policy.

  17. 17 Scott Sumner July 20, 2011 at 2:52 pm

    Lars, I seem to recall that Bill Woolsey did some work on “indirect convertibility” in the 1990s, but don’t recall the specifics. I know there was dicussion of combining Fisher’s ideas with the futures targeting aprpoach.

    Do you have any citations for McCallum? (on either Singapore, or his opposition to QE2?) I am a big fan of his work.

  18. 18 Lars Christensen July 20, 2011 at 3:21 pm

    Well, Scott, we are both big fans of McCallum’s work.

    Maybe I was to hard on McCallum in terms of opposition to QE, but I seem to remember that he sound rather Austrian in some comments regarding Greenspan period money policy in comments he made in some papers for the Shadow Open Market Committee. However, that is unclear…Anyway, it does not change the fact that he is certainly one of the most clever economists around.

    McCallum’s work on Singapore is very interesting as it could serve as an inspiration for other small open economies – countries like for example Iceland. See for example here: http://www.mas.gov.sg/resource/publications/staff_papers/Staffpaper43McCallum.pdf

    In terms of Bill’s work. I have been studying that – I guess there is a Cato paper on it. It basically don’t have to be complicated – if NGDP is to low let the dollar weaken and if NGDP is too high let the dollar appreciate. Nonetheless I just once again want to stress that a bit more attention is given to the instruments other than just to the targets.

  19. 19 crimethinkerblog July 23, 2011 at 4:29 pm

    Maybe my understanding is off, but – if we were to fix the definition of a dollar as, say, 1/1600 oz of gold, and then the price of gold, for whatever reason, suddenly dropped to $200 per oz., we’d definitely have an issue. But I’m not sure it’s inflation or deflation.

    If, as in this example, I can take my $1,600 to a US bank and get 1 oz of gold, or go into the gold market 8 oz, then it’s obvious where I’m going. Then, I’m heading to a US bank and getting $1,600, going right back into the gold market for another 8 oz, and so on. In this scenario, there would be an enormous shift in demand for gold – the price would not stay at $200 per oz for very long.

    I guess I’m missing something?

  20. 20 David Glasner July 23, 2011 at 10:41 pm

    Crimethinker, What you are missing is that when the price of gold is fixed in terms of the dollar by a credible convertibility commitment, the nominal price of gold cannot change. The case that I have in mind, though, is what would happen under those circumstances if people started selling gold because they have concluded that gold has reached its maximum value and its time cash in. When everyone cashes at $1600 an ounce there will be a glut of gold on the market unless the government has an unlimited demand to hold the gold stocks so that the only way for the lower value of gold to be manifested is for the prices of everything else to rise. This actually happened in world war I, when all the belligerent countries melted down their gold coins to use to pay for war materials. The neutral countries like Sweden, Switzerland, and the US till1917 experience rampant inflation while still on the gold standard because of the huge supply of gold thrown on the market drove down the real value of gold. The official price of gold never changed, however.

  21. 21 crimethinkerblog July 24, 2011 at 10:59 am

    David, I don’t dispute the WWI part of the story. But as for the first line, I’ve really missed something – I’ve always understood the gold standard to mean something very different.

    In particular, the price of gold is definitely not fixed. Instead, the dollar is defined as a certain weight of gold, and the markets then determine the price of gold. Of course, this feature means that the purchasing power of the dollar can fluctuate.

    If the governments stand ready to pay a certain fixed rate, that’s one thing. But the actual price of gold in the market does not get fixed. Maybe I’m confusing the real and nominal prices in some sense….?

  22. 22 David Glasner July 24, 2011 at 2:33 pm

    Crimethinker, What you are missing is that if a dollar is defined as a certain weight of gold, it is logically impossible for the price of a dollar to change just as it would be impossible for the price of a five dollar bill to change. If a dollar is equal to one-fifth of a five dollar bill, how could the price of a five dollar bill change in terms of dollars. The price is fixed at a 5 to 1 ratio. If a dollar is deffined as a fixed weight of gold, the value of gold in terms of dollars is fixed by the ratio of gold to dollars. If the value of gold changes the value of a dollar must change. Supporters of a gold standard like to assume that the value of gold is somehow very stable so that its value determines the value of a dollar, but it is logically no less possible to posit that it is the value of a dollar that determines the value of gold. That was certainly the case for most the Bretton Woods system, which was a kind of quasi gold standard in which it was almost certainly the case that the value of the dollar was determining the value of gold rather than the other way around. At some point, however, the dollar lost enough value and the demand for gold increased enough, owing to the genetically determined propensity of French politicians and central bankers to hoard gold, that the United States could no longer maintain the $35 an ounce fixed price.of gold, and the system gradually unraveled between 1968 and 1973.

  23. 23 crimethinkerblog July 24, 2011 at 6:31 pm

    David, I see what you’re saying…but I think I’ve used lazy language. There’s no doubt the official exchange value is fixed – but that doesn’t mean that someone can’t go on the market and trade for a different price, if the value of gold changes.

    As you say “If the value of gold changes the value of a dollar must change.” So the value isn’t fixed. I think the key is that the gold is money, so it doesn’t matter how we define the dollar as long as we don’t change the definition – what matters is the purchasing power of the money (gold). When we change the definition to “solve” some sort of market crisis, that’s what has always gotten us into trouble.

    And I can’t speak for anyone but myself, but I’ve never assumed that the value of gold is “very stable,” only that it is not subject to the whims of some central banking committee. The value of gold, and therefore the purchasing power of the dollar, have to change as market conditions change. I’d argue that this is one of the features that makes the gold standard work.

    As for value of the dollar determining the value of gold – I think that is actually less logical. As long as people are allowed to trade the commodity at whatever price they wish, then the supply and demand of that commodity must determine its price.

    As for Bretton Woods, that whole fiasco sort of makes my case – that was, essentially, an attempt at price fixing for certain groups at the expense of others. There’s really no reason to even call that system a gold standard (not by historical standards, at least).

    I also have to say thank you for responding like this, and I am enjoying your blog. Hope you keep it up!

  24. 24 David Glasner July 25, 2011 at 12:30 pm

    Crimethinker, You said: “There’s no doubt the official exchange value is fixed – but that doesn’t mean that someone can’t go on the market and trade for a different price, if the value of gold changes.” No, sorry, that’s exactly what it does mean. If there is an effective commitment to convert money into gold at the official price no will sell for less and no one will buy for more than the official price. If the value of gold changes, that change in value can be manifested only in a corresponding change in the prices of all goods other than gold.

    Then you said: “‘If the value of gold changes the value of a dollar must change.’ So the value isn’t fixed.” We are having semantic issues here. The price i.e., the number of units of currency per ounce of gold is fixed, but the value (i.e, the purchasing power) of gold (and of the dollar) is not fixed.

    “I think the key is that the gold is money, so it doesn’t matter how we define the dollar as long as we don’t change the definition – what matters is the purchasing power of the money (gold).” Gold may or may not be money; it is the standard. Whether it is money or not depends on whether it is actually used in exchange (e.g., gold coins) or whether paper or tokens are used.

    “When we change the definition to “solve” some sort of market crisis, that’s what has always gotten us into trouble.” I’m not sure what you are referring to here. But FDR actually stopped the downward spiral of the Great Depression in March 1933 when he devalued the dollar, triggering the fastest expansion in US history from April 1933 to July 1933. That was exactly the right thing to do then, and should be the model for monetary policy now.

    “And I can’t speak for anyone but myself, but I’ve never assumed that the value of gold is ‘very stable,’ only that it is not subject to the whims of some central banking committee.” Sorry, but this is exactly what I was trying to say. It was central bankers who started the deflation of 1929 by trying to increase their holdings of gold as they returned to the gold standard. That increased the value of gold, driving down the prices of everything else. And guess what? The Great Depression started. So a gold standard absolutely doesn’t mean that central bankers can’t affect the value of gold.

    “The value of gold, and therefore the purchasing power of the dollar, have to change as market conditions change. I’d argue that this is one of the features that makes the gold standard work.” Do you think that central bankers don’t affect market conditions for gold? Who do you think was buying and selling most of the gold being produced in the world? Central bankers. It’s actually one of the features that makes the gold standard so dangerous.

    “As for value of the dollar determining the value of gold – I think that is actually less logical. As long as people are allowed to trade the commodity at whatever price they wish, then the supply and demand of that commodity must determine its price.” Central bankers are people too, and they have lots of gold to trade. Don’t you think that they can affect the value of gold through their decisions about the amount of gold that they want to keep in their vaults?

    On Bretton Woods, I agree that it was not a true gold standard. It was a system under which governments and central banks colluded to maintain a fixed price of gold. But their ability to control the gold market given their differing incentives was not unlimited so that eventually the system unraveled.

    Thanks for your kind words. Excuse me if the tone of my responses may have started to get a bit exasperated, but I only got about 4 hours of sleep last night after finishing my latest blog post.

  25. 25 Terry Mcintyre July 29, 2011 at 7:45 pm

    This claim to be “pragmatic” and “nonideological” is a steaming pile of horse manure.

    It’s just a device used to dodge the fact that the ideology of spending money which doesn’t exist is guaranteed by both theory and evidence to cause severe economic problems – malinvestments and boom-and bust cycles.

  26. 26 David Glasner July 30, 2011 at 7:15 pm

    Terry, Thanks for your input.


  1. 1 Free Banking » Free banking and the historical gold standard Trackback on July 19, 2011 at 10:06 pm
  2. 2 The Bubble That Is Gold « Increasing Marginal Utility Trackback on July 23, 2011 at 1:17 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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