Comments on: Ron Paul and the Gold Standard

By: Anonymous

Anonymous — Sat, 10 Nov 2007 20:50:08 +0000

Josh:
Your comments fail on both the fronts of law and economics. And don’t tell me just because you hold degrees in the subject makes you right. I hold degrees in the same subjects.
First, on the law, it is “enumerated”, not “innumerable”. And the issue of delegation of constitutional authority is highly debated. I wish people would stop treating that because it is done it is constitutional. The fact is separation of powers is the most underdeveloped area of law. There’s good reasons why these questions haven’t been settled completely, but we live in the void of definitive answers and unfortunately that comes with consequences. The issue is hardly settled, but realistically, I don’t think arguing over the constitutionality of the issue is all that helpful. The constitution is a human invention. A good one, but a human one. I’d rather dig deeper into the why it might make sense on a point.
Second, the complaints that people might stop valuing gold are theoretical, just not historical. This is the problem. People don’t think about the true nature of money. How it came to be and why it is useful. And they fail to compare idea with experience. I can easily admit that it is theoretically possible that tomorrow mankind might think dogshit is the height of value and start using that as a store of value in exchanges. But reality says it isn’t going to happen. So, for all the complaints people make in theory about gold, they just don’t hold up historically. The real question to ask is why thousands of thousands of years of human history have seen it as valuable. Maybe, just maybe, it’s not mere preference. Maybe, just maybe, there’s something in the nature of the vehicle for storing value that reinforces people’s acceptance of the system.
The real complaint about an institution like the fed is with the concept of the money multiplier. That’s the heart of Paul’s inflation tax complaint.
Stop being a technician and showing me you mastered a few algebra equations from Econ 102 and ask some why’s about the concept of the money multiplier.
Plenty of people go overboard and put on the tin-foil hats, etc. But there are real, legitimate questions to be asked on the economic front if people are willing to actually get past being technicians and restore economics philosophical roots.
I don’t know if a return to the gold standard is the answer, but there are real insights in their critique that are worth an honest airing.

By: Chris S

Chris S — Fri, 09 Nov 2007 01:24:07 +0000

The Fed… How Byzantine…

By: rhys

rhys — Thu, 25 Oct 2007 17:10:52 +0000

Money is a commodity. Its value fluctuates against the price of other goods and services. But, much confusion occurs when money is equated to wealth. Wealth is the backing for money, just like a car is the backing for a car title. By increasing car titles, we will not increase the number of cars, and the inflation of the supply of car titles will devalue them relative to the wealth they represent.

The US dollar is currently backed by debt obligations of the US government – ie. the future taxing authority of the US government. So our money represents debt (credit) and not wealth. Sound money must represent wealth and not credit, that way, the holders of the currency don’t have to worry about being subjected to a credit check (margin call).

Gold just happens to be an inert, rare, highly divisable element that is easy to distinguish because of its color and physical characteristics. It also is of little use in most types of manufacturing and has a relatively stable production rate. All of this makes it one of the best commodities to fill the role of money (which is why it was chosen by international traders over the course of human history).

In 1910, a man’s suit, shirt, tie, and dress shoes could be bought with $20 – 1 oz. gold. In 2007, a man’s suit, shirt, tie, and dress shoes can be bought with $750 – 1 oz. gold. I abhor government price controls because they inevitably lead to overproduction or shortages. It is no different with interest rates. The government controls interest rates, which are related to the dollar through debt monetization – and they create shortages (monetary deflation) or overproduction (monetary inflation) – and consequently make long term capital investment overly risky. Sound money, backed by real assets, is the only form of money that is trustworthy enough to be used by a free people in a free nation.

By: Phil

Phil — Thu, 25 Oct 2007 16:26:31 +0000

Here’s what’s really irritating about what the Fed does: It tries to manipulate levels of economic activity, rather than simply monitoring true inflation (the money supply). I think it encourages irresponsible, short-term-focused investing and spending.
I have to grit my teeth when I see the Fed sitting down and talking about lowing interest rates because people are defaulting on their mortgages, or because the stock market is down, etc.
So the various investment markets become guessing games, trying to predict what the Fed will do next. And the Fed is watching these same markets, for indications of what it should do next! So the situation becomes sort of a self-fullfilling prophesy, where petulant consumers, banks, and investors sit around and pout and don’t invest until the Fed gives in and lowers interest rates.
And then, of course, you get a frenzied bull market for a short time, as everyone runs around trying to capture the new money the Fed has injected into the system — effectively rent seeking.
This isn’t the Fed really fighting inflation at all. It’s playing around with a money spigot, trying to control the level of economic activity in our country, to keep it at a relatively even pace. It thus dampens the impact of negative actions (like the absurd excesses of the recent sub-prime mortgage boom).
And the economy generally doesn’t take many threats seriously, because we know if things get really bad, hey, at least there’ll be lots of cheap money out there to borrow.

By: Joshua Claybourn

Joshua Claybourn — Thu, 25 Oct 2007 13:43:33 +0000

Matthew: Thanks for the heads up. Error corrected.
Mr. Tyler Watts,
As a former student of economics, I would like to kindly point out a few errors in your statement on Ron Paul’s monetary policies.
You stated:
“Where does this money come from? It does not come from the US Treasury! This money is entirely new, created ex nihilo by the Federal Reserve- a check drawn upon itself. This is inflation.”
I’m well aware of what Mr. Paul refers to when he says the Fed prints money. But the characterization is misplaced. The Fed does not print money; it distributes it as an agent of the US Treasury. Printing paper money does not cause the money supply to increase. When dollar bills are issued, it results in a corresponding decrease in reserves or demand deposits. The Fed simply doesn’t cause inflation by ordering new bills.
Nevertheless, the government does empower the Fed, as an agency, to conduct its obligations. This is nothing new and certainly isn’t unique to the Treasury. But this type of agency function lies at the heart of Paul’s criticism of the Fed. He argues:

The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank.

However, the Constitution grants innumerable powers to Congress, which Congress then passes off to executive agencies. Nothing new here. We can criticize how the Fed operates as we criticize so many aspects of government policy, but it isn’t unconstitutional.
The bigger picture here is that Paul is essentially leveling two separate criticisms – one at the existence and authority of the Fed, and the other at the type of currency that the Fed uses. I do agree that gold has it uses, which is why I’d favor the ability of currencies to compete.
Regards,
Joshua Claybourn
Indiana University (BS ‘03, JD ‘06)

By: George W

George W — Thu, 25 Oct 2007 13:08:00 +0000

I’ve never been a student of economics… Indeed, the only time I took an econ class, I spent much of that semester drunk, missed the final and mercifully got a “D” by a retiring professor tired of failures.
But it’s not like gold has any real value. It, like a floating currency, it simply worth whatever someone wants to pay for an ounce of gold. Gold is just a shiny rock, and its value floats daily, just as the value of a dollar floats daily. It trades on the commodities market like pork bellies, (though, like petroleum, its price is not set by supply-and-demand, but rather by international bureaucracies and political currency), doesn’t that make it a crummy benchmark?
I mean, we can’t control its production, we don’t control its value, we don’t control its supply. What is different between that and any other commodity? Why not use a silver standard? Corn standard? Unleaded standard? Paperclip standard? They’re not worth any more than someone is willing to offer, either.
I mean this in an earnest (and skeptical) way. What’s so great about gold?

By: Tyler Watts

Tyler Watts — Thu, 25 Oct 2007 05:59:42 +0000

Mr. Claybourn,
As a student of economics, I would like to kindly point out a few errors in your statement on Ron Paul’s monetary policies.
You stated:
“A common refrain by Paul is that the Fed “prints money” or just issues new currency whenever it needs cash. Paul also blames much of the national debt on the Fed. These are mostly erroneous claims that stretch the truth.”
The FED does not print money per se, but it does indeed issue money through its open market operations. When the FED purchases US government bonds, it injects new money into the economy in the form of bank credit. Where does this money come from? It does not come from the US Treasury! This money is entirely new, created ex nihilo by the Federal Reserve- a check drawn upon itself. This is inflation. This is what Mr. Paul is talking about when he says that the FED prints money. The upshot is that the FED is crucial for the way the government practices inflation these days because of its ability to monetize US government debt in this way. The fact that inflation is done in this roundabout way, and not directly through the printing press, makes it that much harder to understand and hence that much more convenient for the government to practice.
Next, you state:
“The possibility of inflation under a gold standard is just as great as it is under fiat currency. And there would be absolutely nothing we could do about it.”
You are right to say that gold is not totally immune to inflation- the gold supply is continually increased through mining. But, unlike fiat currencies, there are physical limits (i.e. costs) to expanding the gold supply. Moreover, as Alan Greenspan has pointed out, Gold has a very high stock to flow ratio, meaning that new annual production is a tiny fraction of the existing stock. Gold can be inflated withing extremely narrow limits; government paper can be inflated ad infinitum. Hence gold money (and other commodities) are our best defense against inflation. At best-i.e. when politicians and central bankers behave well, such as our current situation- inflation amounts to a tax on all dollar holders, a tax which bears largely upon wage earners and pensioners, those at the bottom of the economic ladder. At worst, inflation causes severe economic distortions- business cycles- often leading to the eventual ruin of the currency and economic chaos.
Finally, I would like to point out that inflation and war go hand in hand. Inflation is very much a hidden or disguised tax, hence it is politicians’ favorite way of paying for wars. If the taxes for wars had to be directly levied upon the people, beforehand, how successful would politicans be in initiating and escalating wars of agression? While it certainly would not bring an end to conflict, a true gold standard would be a great step towards international peace by the very fact of making it harder for politicians to fund their wars. Gold money goes hand in hand with peace.
Dr. Paul is an avid and intelligent student of Economics, and his advocacy of gold is well studied, well reasoned, and a very, very important aspect of his overall policy of freedom and peace.
Respectfully Yours,
Tyler Watts
George Mason University, Fairfax, VA

By: Matthew

Matthew — Thu, 25 Oct 2007 04:36:30 +0000

That’s a good post. However, massive new gold deposits would cause inflation, not deflation.

By: George W

George W — Wed, 24 Oct 2007 20:15:07 +0000

"If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

"Cross of Gold" William Jennings Bryan, July 9, 1896

By: philosopher

philosopher — Wed, 24 Oct 2007 19:17:26 +0000

It is an odd state of affairs for the GOP that the sanest person running for their presidential nomination is still, in several key ways, a kook.