Last week I commented on the views of James Grant about the gold standard. I disagree with Mr. Grant about the gold standard, but he knows a great deal about a lot of things and he understands really well how financial markets work at the ground level. Aside from that he is a really good writer, which suggests that he is a clear, if occasionally misguided, thinker. This week, I turn to Dr. Judy Shelton, writing in the new (August 1) issue of the Weekly Standard (“Gold Standard or Bust”) and extolling the virtues of the gold standard. I don’t know, and have never met Dr. Shelton, but she has been a frequent op-ed contributor to the Wall Street Journal and various other publications of a like ideological orientation for 20 years or more, invariably advocating a return to the gold standard. In 1994, she published a book Money Meltdown touting the gold standard as a cure for all our monetary ills. I also observe that she is listed as a contributor on the Free Banking blog, but has yet to post anything.
I was tempted to provide a line-by-line commentary on Dr. Shelton’s Weekly Standard piece, but it would be tedious and churlish to dwell excessively on her deficiencies as a wordsmith or lapses from lucidity.
But consider the following passage:
As government-issued claims against our country’s future output accumulate, there is a hollowing-out effect, with financial capital drawn away from the real economy. Real economic growth happens when private investors take their chances on innovative entrepreneurs – not when they are induced to purchase “safe” government securities.
What can this possibly mean? That government borrowing necessarily takes resources away from the private economy? What if those resources are not being used and would remain (temporarily or permanently) idle but for government borrowing? What does it mean for “financial capital to be drawn away from the real economy”? Drawn by what? By rising interest rates? Aren’t interest rates now at the lowest levels since the Great Depression? And how does government borrowing induce private investors not to “take their chances on innovative entrepreneurs?” Might the level of aggregate demand possibly be relevant to this discussion? I don’t say that the answers to these questions are obvious, but Dr. Shelton, securely ensconced in her own ideological cocoon, seems blissfully unaware that the questions even exist.
Dr. Shelton continues:
Since the resources needed to pay for current government expenditures are not available, the government is laying claim to future revenues.
That seems like a truism, but Dr. Shelton is just preparing us for the following profundity:
The notion of money as a claim on tangible assets is thus rendered abstract.
OK, time to move on.
After having established, to her own satisfaction at any rate, the imminent danger of currency debasement, Dr. Shelton conjectures that the interests of ordinary Americans have come into perfect alignment with those of la haute finance internationale.
The connection was made last November when former Alaska governor Sarah Palin called for a stable dollar to put our economy back on the right track. ‘The Fed’s pump priming addiction has got our small businesses running scared,” she noted, “and our allies worried.” Robert Zoellick, who heads the World Bank, lamented in a Financial Times op-ed that global consternation over the Fed’s quantitative easing was prompting talk of currency wars. Zoellick proposed that the global monetary regime be reformed to spur economic growth —and suggested that nay new system should “consider employing gold as an international reference point.”
Perhaps Dr. Shelton has forgotten, but within two days of his reference to gold, Mr. Zoellick specifically denied that he meant to support or suggest restoring the gold standard. But for Dr. Shelton, gold should not be a mere reference point, but a standard. Why? Because gold stands for discipline, so that people who mistrust the government can cash their currency in for gold at the fixed parity. In this way, the money supply will adjust to “the collective assessment of market participants” rather than to the “less-than-omniscient hunches of central bankers.”
According to the ideology of the gold standard, a gold standard would make the value of money totally independent of the “less-than-omniscient hunches of central bankers.” The value of a dollar would be identical to the value of gold, not to what the central bankers want it to be. But, in a recent New York Times story about the revival of interest in the gold standard, it was reported that central banks still have 29,000 tons of gold sitting in their vaults out of perhaps 166,000 tons of gold that have been mined throughout world history. Why does Dr. Shelton, or anyone else, imagine that, with such an enormous stockpile of gold under their control, the value of gold would be insulated from the decisions or whims of central bankers?
Gold provides a self-correcting mechanism for irrational exuberance; as credit begins to flow too freely, as equity values or commodity prices appear frothy, the astute observer at the margin cashes out in gold. Monetary central planning gives way to the aggregate wisdom of the free market.
Here Dr. Shelton indulges in a favorite trope of modern gold standard ideology: the facile identification (and deliberate confusion) of central banking with central planning.
Quoting Ludwig von Mises, Dr. Shelton extols the gold standard as a barrier against runaway government spending, as if there was no government borrowing under the gold standard. Once in a lecture, Mises offered the following argument:
If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say: “And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.”
Yet, without a tinge of embarrassment, Dr. Shelton also invokes the memory of Jack Kemp, who not very successfully sought the Presidency on a promise to cut taxes and restore the gold standard. Some of us, however, still remember when Kemp, defending the Reagan administration, to the delight of the Wall Street Journal editorial page, for running huge deficits during a recession, declared that Republicans “no longer worship at the altar of a balanced budget.” But that was then and now is now.