The Gold Standard
(and Monetary
Policy in general):
Or just because the lubricant can
seize the engine doesn’t mean that it drives the engine
Economics Without The B.S.**:
[** Double entendre intended.]
I must respond to a recent James Grant op-ed in the Wall
Street Journal [https://www.wsj.com/articles/the-fed-could-use-a-golden-rule-11562885485?mod=e2two] this past week where he is using
President Trump’s appointment of Judy Shelton to the Federal Reserve Board, who
is an advocate of returning to the Gold Standard, as an opportunity to
criticize the capriciousness of our monetary policy since Nixon decoupled gold
from the dollar and internationally we have allowed currency values to float
against each other on a daily basis. The
esteemed Mr. Grant, like many monetarists, has the economic engine confused
with the lubricant needed to keep it operating; overlooking just who/what is
doing the driving and is responsible for performance. While money is a necessary resource it is not
the key determinant in the performance of an economy providing for society’s
needs. So let me take off my Carhartts
and exchange my Red Wings for something lighter and more comfortable as I
attempt to diagnose Mr. Grant’s thesis and enlighten him on the nature of a
work effort, which after all is what we are talking about when we discuss
economics, the allocation of [scarce] resources in an efficient and productive
way to accomplish work.
What Mr. Grant gets right is that gold is the international
standard of value for money; it sits at the apex of the hierarchy of money –
gold, paper money of a sovereign, bank notes, credit instruments, etc. What he gets wrong, along with other gold
bugs, is that gold has no intrinsic value in and of itself. It’s value is determined by its use and what
it represents, which has been since the Napoleonic era the primary country
backing the gold reserves of the world – the British pound sterling through the
19th Century up to World War I and the U.S. dollar after World War
II, with the world in a bit of uncertainty during the interregnum of the 1920s
and 1930s. In other words, gold is no
more than a sycophant to the best performing economy in the world as perceived
by others. Using gold, or any other form
of money, is just an artificial value representation of work. Aside from money’s use for payments, it
provides the float system, the grease if you will, necessary for intermediaries
to make markets between those that have money to lend and those that need money
to operate.
The other point that Mr. Grant gets right, but he is
critical of the point, is when he says, “Gold-standard
central banking concerned itself with the present. Millennial central bankers
dare to take a view of the future.”
Money is found in human societies when they become civilized, no longer
living like the rest of the animals; but living in groups, exchanging goods and
services, and having some concept of a future existence. Interest rates fundamentally represent the
concept of a future and the value and costs associated with that future
compared with the present.
Mr. Grant yearns for a return to
the gold standard and laissez-faire; but, since World War II as the U.S. has
emerged on the international scene in an activist role to spread its values of
democratic liberalism and enlightened self-interest primarily through its
economic and diplomatic activity backed by a strong military presence, the
world has become more democratic, trade has replaced colonialism, and economic
growth has fostered a faster pace of human betterment than any prior historic
period in the same amount of time – even bettering the 34 year period of 1880
to 1914 of Arthur I. Bloomfield’s reference by Mr. Grant
with a period twice that during Messrs. Bloomfield’s and Grant’s (and my)
lifetimes 1947 to 2018, 70 years with a Real GDP per capita (factoring out
inflation and the effects of population) 37% better, 1.93% per year versus
1.41%; the 34 year period 1947 to 1981 with 2.14% was more than 50% better; and
the 15 year post-Sputnik period 1958 to 1973 was almost double the growth rate
at 2.74%.
During this period policy makers have become
more adept at gauging the rate of international progress while maintaining
moderate growth without the wild swings in the business cycle that characterized
the 19th Century.
Mr. Grant expresses concern about the vagaries
of human decision making, but a call back to the days of laissez-faire does not
eliminate or lessen the consequences of human error, especially in a world
order so interconnected in a way not envisioned in prior eras. It is the use of credit that characterizes
our economy today. The gold standard was
a rigid system for managing a modern economy.
What we need and have is the ability to expand and contract credit in
relation to the rate of growth. We
haven’t eliminated the vagaries of the human dimension, but we have managed to
provide better management of the national and international system.
If there is to be a criticism today it would be
in how we manage the trade off between economic growth versus economic
stability. I think a premium has been
placed on stability while sacrificing growth, probably because policy makers
realize the lead role the U.S. plays internationally where monetary policy set
by our Federal Reserve causes others internationally to react to it. But here in the U.S. that slower growth rate
has led to a less dynamic society which has bred growing income inequality which
has had negative effects in our political arena. Where Mr. Grant advocates for the supposed consistency
that comes from the gold standard, I advocate for more dynamism in our economic
policies which also provides much needed vitality to our political system. This very point was made this past week in
another op-ed but in the New York Times by historian Lizabeth Cohen [https://www.nytimes.com/2019/07/10/opinion/affordable-housing.html] recalling the days of a more active federal government role
for fiscal policy in achieving public policy objectives where relying on the
private sector has been lackluster.
Money does not drive economic growth, people
do. It is the work effort of people that
determines output. If you have three
businesses, identical in every way – building layout, number of employees,
making the same product or service, etc. – and you fund each of them to their
needs; you will not get the same performance for each of them, one will be
better than another. Money is a stop/go
decision; it is not the determinant of performance level. Monetary policy is a blunt instrument;
whereas fiscal policy, especially investment, can be tailored and targeted to a
specific goal. It is money coupled with
human effort that determines our economic output; and, that is why the public
sector coupled with the private sector have produced the greatest broad-based
growth during the post-Sputnik period to the early 1970s and even beyond. And that is why the standard of living in the
Free World pulled away from communist systems during this period which
eventually led to the collapse of communism in Europe.
