Interventionists Are Apoplectic

It was as though the World Bank president had farted in church. When Robert Zoellick mentioned in an editorial it the FT that gold might play a role in a future monetary dispensation – which dispensation has become a hot topic in recent years, as the post Bretton Woods fiat money regime's implosion continues apace – he sent the Keynesian brigade that rules economics in both academe and policy making circles into veritable paroxysms of denunciation.

 

The Financial Times (a well-known refuge of statists and interventionists) that originally published Zoellick's editorial, blared: 'Zoellick’s call on gold standard dismissed' , noting:

 

„Reactions to World Bank president Robert Zoellick’s suggestion that gold might be used as part of a package of measures to reconstruct the international system ranged from the lukewarm to the bewildered.“

 

Never mind that Zoellick didn't even 'call for a gold standard'. All he said was that he thought gold might 'play a role' in a future monetary architecture as a 'reference point' (whatever that's supposed to mean – it reminds us a bit of the supply-sider's 'gold price rule' idea).

Nevertheless, although Zoellick remained completely faithful to the ideas of central economic planning in his article (as befits his station), the mere mention of gold rendered the crypto-commies who represent today's 'economic mainstream' completely apoplectic.

After all, they think to a man that there is nothing better for the economy than having the political class spend other people's money with both hands and for central banks to inundate us with worthless paper money up to our eyebrows.

Besides, their holy prophet, the intellectual father of the nutty inflationism practiced by the fractionally reserved banking cartel and its central banks, John Maynard Keynes, once denounced gold as a 'barbarous relic'.  Of course Keynes did not 'invent' inflationism – he merely adopted the ideas of Silvio Gesell and several of his contemporaries who likewise thought you can get something from nothing. Let's call them the 'free lunch brigade' – long ago refuted by real economists, but because they said what the political class wanted to hear, their doctrines nowadays represent the 'economic orthodoxy'.

Some of the comments by this 'economic intelligentsia' are real howlers. Take Fred Bergsten of the Peterson Institute:


“Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said that Mr Zoellick’s overall approach was “very sensible” but that the idea of using gold was “minor and really irrelevant”.

The world does need new international “rules of the game” as it evolves towards a system that uses multiple reserve currencies rather than just the dollar, Mr Bergsten said, but gold should not be part of it.

“I happen to think that gold is a very poor reference point because it fluctuates so widely,” he said.

 

Gold fluctuates 'wildly'? Perhaps someone should point out to Mr. Bergsten that it is not gold that 'fluctuates wildly', but fiat currencies that are fluctuating wildly against gold – mostly in a downward direction over the past decade.

The Peterson Institute harbors more gold-haters:

 

“I think [Mr Zoellick] is living in the past, in particular in the period from 1980-92, when there was a periodic flirtation with gold,” said Edwin Truman, senior fellow at the Peterson Institute. “It’s not constructive and it’s inappropriate.”


Inappropriate! This actually had us laughing out loud. Indignation at the inappropriate 'flirtation with gold'.  As we said above,  it was as though Zoellick had farted in church.

It get's better…

 

“The last thing that the world economy needs right now is another source of deflation in a financial crisis,” wrote Bradford DeLong, professor of economics at the University of California, Berkeley, on his blog. “Attaching the world economy’s price level to an anchor that central banks cannot augment at need is another source of deflation – we learned that in the 15 years after world war one.”


Not surprisingly, DeLong (who is allowed to poison innocent student minds at UC Berkeley) unwraps the 'deflation' bogey. DeLong as you may recall is  something like a less-famous twin of Paul Krugman, a dyed-in-the-wool Keynesian, who like Krugman was not content with Obama's near $900 bn. 'stimulus' spending – he wanted more, and frequently pleaded for more.  Naturally he is not exactly averse to central bank inflation of the money supply either, something a true gold standard would inhibit somewhat.  If central banks 'could not augment the price level at need' the world would surely stop turning.

DeLong in fact became downright insulting –  writing on his blog: 'Bob Zoellick Makes His Play for the Stupidest Man Alive Crown'.  For readers interested in thoughtful critiques of DeLong, his deficit spending voodoo was deftly taken apart by Robert Murphy , while his failure to even understand Austrian capital and business cycle theory (which didn't keep him from commenting on it, alas) was dealt with by Roger Garrison.

 

As we have pointed out previously, referencing Hans-Hermann Hoppe's excellent essay 'Natural Elites, Intellectuals and the State' , modern-day mainstream intellectuals are unfortunately in many cases of sub-par quality, that dare not bite the hand that feeds them. Mediocrity floats to the top, as a direct result of the fact that most feed at the state's trough in some shape or form (with occasional professional vacations at statism-supporting 'think tanks').

As Hoppe notes:


“Intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.

What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

 

That this is so can once again be seen in the reaction to Zoellick's harmless little suggestion. Gold is of course the money of the free market. Money, it must be remembered, originated in the market – it is not a creature of the State. Governments have merely usurped it. Money originated in the market by a process of trial and error – and the one commodity that proved most useful for use as money – gold – was eventually chosen by this market-based process.  As Zoellick notes:


Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

 

Indeed, this is the inescapable conclusion suggested by the fact that a commodity with a theoretical supply of 160,000 tons acts in the market as though it were a currency. If gold were a 'mere commodity' that the market did not consider as having the qualities of a 'monetary asset'  , it would collapse in price due to its supply vastly exceeding industrial and fabrication demand. While gold is currently not money in the sense that it is not used as the medium of exchange, it is nonetheless  clear to everyone that it would be our money if money were left to the free market and not be under the control of governments, which via legal tender laws and other coercive methods impose the 'paper standard'.

Anyway, Zoellick as we mentioned did certainly not advocate a 'gold standard' and he certainly did not advocate what is actually necessary: the complete denationalization and privatization of money. Money must become part of the free market again if we want to end the eternal boom-bust cycles the central banks , the fractionally reserved banking cartel and profligate governments are inflicting on us.  It is almost certain that the free market would choose gold (and maybe also silver) as its money. Everybody knows it, so why not say it?

Here are a few more of the reactions to Zoellick's proposal:


“Edel Tully, an analyst at UBS, reprised a 19th century argument about the gold standard. “Any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of this basic requirement,” she wrote in a report.”

 

This is the old 'there isn't enough of it' canard – which can be considered refuted long ago and simply makes no sense whatsoever. It is completely immaterial how 'big' the supply of money is. Any supply of money will render the services money needs to render. In a free market economy (note here that we do currently not live in a system of  free market capitalism), the purchasing power of money would rise to accommodate the increase in goods production and trade. This is how in a free market living standards would improve: real incomes would steadily rise. Since Nixon threw the 'gold anchor' overboard in 1971, real incomes have stagnated, while the money supply has been expanded at incredible rates, a fact that speaks for itself.

As Rothbard wrote:


“Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not–unlike other goods–confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices–i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various "real" utilities, so than an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or "purchasing power." Our law–that an increase in money does not confer a social benefit–stems from its unique use as a medium of exchange.

An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines.”

 

In reaction to Zoellick's mention of gold,  every inflationist argument under the sun, no matter how utterly misguided and how long ago refuted was unwrapped by the 'free lunch brigade'. Arch-Keynesian Nouriel Roubini – once again completely ignoring that Zoellick did not even call for a gold standard! – fulminates:


“A gold standard would make business cycles more extreme and make it impossible for central banks to fight inflation or deflation, Nouriel Roubini says. "A fixed exchange regime… just doesn't work. Because in that world, monetary policy by definition instead of being counter-cyclical becomes pro-cyclical… It just exacerbates the business cycle."

 

Well, good grief…there is a business cycle because the central banks inflate the money supply and 'fix' interest rates below their natural rate indicated by time-preferences. How could a gold standard possibly 'exacerbate' the business cycle? And who says we need a central bank anyway? If gold were once again our money there would hardly be a need for one (the fact that Roubini was once employed by the Fed is no good reason to keep it).

Anyway, there you have it – the mainstream – or rather, lame-stream – economics intelligentsia is up in arms as soon as anyone merely hints at  'gold' playing a monetary role again (even if just a 'small one') – that alone should tell you all you need to know.

These are the people supporting the status quo – what their advice and their voodoo economics have wrought is plain to see for everyone. If they hate gold – and they obviously do so with a passion – then gold-based money is exactly what we should demand.

As an aside, we have previously written on the question whether returning to the gold standard would be desirable, and dealt with many of the objections raised against it. Here is a link to the essay – 'Should we return to the Gold Standard?' , which we wrote in 2008 shortly after the stock market crash.

 

 



 

 

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8 Responses to “Robert Zoellick Mentions the Un-Word”

  • Bearster:

    groucho: your proposal is incoherent. But what I could understand of it reeks of Statism. Would politically-correct people get more credit than others who don’t toe the party line?

    Pater: great article, but I think you meant at the end to distinguish between hoarding (i.e. keeping your gold coin under a mattress or in a safe) vs. saving (i.e. lending your gold to a bank, who will lend it to productive enterprise) vs. investing (i.e. buying stock) vs. speculation, which I think would be almost non-existent in a laissez-faire gold-based free market. There would be speculation about the weather and impact on crops, but not on FX or what-will-the-next-insane-policy be?

    • groucho:

      Bearster, a personal monetary system is anti-statism. It’s based on personal productivity for societies needs and wants. Gold, silver, wheat, fiat currency, etc. Are state run monetary systems. They form a primary basis for political control over the people. On a moral basis, gold equals fiat. I do believe in society taking care of it’s members in a collective way. The founding fathers of the US spent a lot of time trying to improve over earlier forms of government. With time, the states power has grown far beyond anything they would have imagined.
      A personal monetary system would be an incredible check on the states undeserved power.

    • Bearster, I agree speculation would no longer revolve around the policies of the day, and there would be far less of it than there is today (it would e.g. no longer be necessary for people to take large risks merely to preserve the purchasing power of their savings). However, in the final analysis every entrepreneurial activity to some extent involves ‘speculation’ – i.e., correctly guessing what the future demand for and price of a product will be. I am going to write about this in more detail on occasion (i have mentioned the concepts in the past, but only in passing).
      As to hoarding of money as opposed to investing savings productively – on the face of it, hoarding appears to be negative, but in reality it does not matter. The reason is that the remaining circulating money supply will automatically adjust its real value to the lower supply of money if someone were to hoard money to achieve his own personal goals. The hoarder is not anti-social, he hoards because he e.g. is fearful of the future and does not want to entrust his money to anyone else – this is perfectly legitimate (see also Hans Hermann Hoppe’s ‘The Yield of Money Held Reconsidered’ in this context). Since a smaller money stock in a free market would quickly adapt to this circumstance, the much feared ‘shortage of money’ could not come about. After all, the essential point is not how many units of money there are circulating, but what those units can buy.

  • Let Us Have Peace:

    Pater: Thank you for your web site. It is a pure delight.

    The late 19th century American politicians of both parties (Ulysses Grant and Grover Cleveland being the most notable Republican and Democrat) would have been unable to understand the current debates about gold vs. paper as a monetary standard. They understood what was obvious to every “ordinary” (sic) American voter at the time: if you increase legal tender by diluting the gold content of the coinage or using a metal that the marketplace considers less valuable i.e. silver, the money prices of food, energy and shelter will rise. The silver miners and grain farmers and timber men and cotton growers of the Mid-West, South and West thought this inflation was worth the price because it would increase their incomes. The industrial workers and merchants of the East and Mid-West thought currency expansion would cost them more than they would gain. What neither side questioned was that an increase in the supply of money would affect prices.

    There was another point on which there was nearly unanimous political agreement: whatever was the backing for the country’s legal tender (gold only or gold and silver), paper certificates would have be fully exchangeable. The holder of a United States bank note would be entitled to demand and receive specie at the legal tender rate of exchange. Both the inflationists and their opponents took for granted a fact of commercial life that neither the World Bank nor anyone else in authority can even imagine – the assumption that Money and Credit would NOT be a unified financial system intermediated by central banks. Money would be “hard” – i.e. backed 100% by precious metals; Credit and domestic and foreign exchange would be whatever people agreed that it should be in individual transactions.

    Both the silverites and the believers in the yellow brick road assumed that, in their monetary world, borrowers could fail and lenders could lose money. Neither promised that banks would avoid failure and that depositors’ claims could sometimes end up being worth much less than par. What both promised is that holders of legal tender itself – whether as cash or account holders with banks that acted solely as depositories, not as commercial lenders – would receive coin that was legal tender.

    Our modern world seems unable to understand the paradoxical relationship between thrift and speculation. Credit can only exist if – as Steve Keen points out – capital is created from nothing – whether through bills of credit, accounts receivable or fractional reserve lending. But, at the same time, people can be assured the rewards of thrift if they have the choice of holding their savings as hard money, as paper and coin whose value is set permanently apart from the alchemices of credit creation. The rewards of speculation are wonderful; so are the rewards of saving. The world of the Constitutional gold standard of the last third of the 19th century offered Americans, Britons, French and Germans the freedom to chose saving, speculation and any combination of the two. Ours – with its manipulated interest rates, institutionally-controlled money supply, and pure credit money – offers only the certainty that “ordinary” (sic) people will get sheared.

    • Thank you for that thoughtful comment. Indeed, during the 19th century there was always a high quality political debate in the US over the issue of money. As you correctly remark, the basic tenets of a theory of money and credit were widely understood. In fact, it is no exaggeration to say that in several elections the issue of whether or not to allow inflationism or rather return to ‘hard money’ was the central political issue of the day. Such a fundamental debate is almost impossible to imagine nowadays.
      You may be interested in the three part (so far) monograph i have written on the fractional reserves banking issue. I am heavily indebted to J.H. de Soto, whose excellent book I used as a guide in writing these essays. The first part is here: http://www.acting-man.com/?p=3723
      I plan to soon publich the next parts in this series, and in one of those I am going to explore the monetary history of the United States, as it is imo highly instructive.

  • groucho:

    Pater, why gold? Any commodity is easily manipulated by the states, banks and traders; a fair civilian monetary system needs to be based on an individuals value to society. The state will always get it’s pound of flesh; for the civilian economy a personal monetary system is required. A reflexive productivity scoring method needs to developed to be used in a personal credit system. With productivity checks and balances, each person can print as much credit as they personally need, since society knows it will be the receiver of the goods and services from the productive individual. Social credit should be issued to the living to subsidize the weakest members of society.

    • Groucho,

      my central demand is actually for money to be made subject of the free market. No more central planning of money and interest rates. Such a free market system would regulate itself, just as production and consumption of other goods regulate themselves in a free market setting.
      As to your question ‘why gold’ – it does not HAVE to be gold. We’d be using whichever money the market decides is most useful. However, judging from historical experience, the market has in the past chosen gold (and to a lesser extent, silver) as the most useful money commodity. We can therefore assume, based on historical experience, that the free market would once again most likely settle on gold – until something more useful comes around.

  • Siggyboss:

    Great piece. Zoellick quickly came back and got with the agenda.

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