Home > Economic Thought, Keynes > Gold gibberish

Gold gibberish

from Lars Syll

Eighty years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time – the gold standard. He lamented that

advocates of the ancient standard do not observe how remote it now is from the spirit and the requirement of the age … [T]he long age of Commodity Money has at last passed away before the age of Representative Money. Gold has ceased to be a coin, a hoard, a tangible claim to wealth … It has become a much more abstract thing – just a standard of value; and it only keeps this nominal status by being handed round from time to time in quite small quantities amongst a group of Central Banks.

gold

Ending the use of fiat money guaranteed by promises for currencies once more backed by gold is not the way out of the present economic crisis. Far from being the sole prophylactic against the alleged problems of fiat money, as the “gold bugs” maintain, a return to gold would only make things far worse. So yours truly – just as Keynes did – most certainly reject any proposals for restoring the gold standard.

The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!

Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already eighty years ago in Essays in Persuasion:

Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.

Allowing this debt deflation process – the analysis of which was later developed by Irving Fisher and Hyman Minsky – would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.

So why would anyone want to reinstate a gold standard? The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and – even harder than with “independent” central banks – force countries to pursue restrictive economic policies that at all costs keep inflation down.

Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):

We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses.

So, next time you want to come up with some new idea on how to solve our economic problems with a magic gold bullet, remember new economic thinking starts with reading old books! Why not start with the best there are – those written by John Maynard Keynes.

gold_bug

  1. October 27, 2013 at 1:44 pm

    Today’s goldbugs are to an increasing degree digital. They advocate bitcoin as the new panacea. Many of them consider this to be a progressive, anti-bankster position. There is a need to puncture the bitcoin balloon with arguments, since bitcoin has become so fashionable.

    (Financially, the bitcoin balloon will regularly burst of itself due to its nature, but then – sadly – start inflating again.)

    • October 27, 2013 at 2:11 pm

      Someone here might be interested in this: I was on the Keiser Report yesterday, see last half in link: http://rt.com/shows/keiser-report/episode-515-max-keiser-717/
      … about parallel electronic currency as a eurocrisis remedy for Greece and others. Note how strongly Max Keiser pushes bitcoin as an alternative.

      [ Please ignore the bad skype connection and my nerdy posture, this was my first skype TV interview ever, felt like a rabbit in car headlights. Switch off the picture if necessary ;-) ]

  2. William Turnier
    October 27, 2013 at 2:00 pm

    Within the Eurozone, the Euro is effectively a “paper” gold standard for those countries who are members of the Eurozone. Marvel at its result all who yearn for US to return to the gold standard.

    • October 27, 2013 at 2:05 pm

      Agree. A problem is that the regular eurozone conferencing and activist circuit against the troika’s austerity policies is dominated by factions and persons who don’t want to mention the elephant in the room, the need to question and find alternatives to the euro. Many of the austerity critics are in thrall to the euro and the idea of a Federal Europe, and their only “remedy” is thus repeated and futile appeals to the troika for “eurobonds” ; and a “new EU social policy”.

    • October 27, 2013 at 7:09 pm

      The Eurozone has the world’s biggest government bureaucracy which is why it will fail. Financial problems are effects, not causes, of failure.

  3. October 27, 2013 at 3:15 pm

    Gold bugs are as much irrelevent as Keynes. “100% gold standard” as promoted by neo-Austrians is definitively not the solution. Since many years Pr. Fekete and the **New Austrian School of Economics** (not to confuse with Mises) has described how to build a truely resilient monetary system based on Gold.

    But above all, the key point now is not to choose to go on gold or not: the international monetary system is indeed running to gold as fast as it runs towards multipolarity :
    http://conscience-sociale.blogspot.com/2013/10/limplosion-du-marche-comex-et-la-de.html

  4. October 27, 2013 at 7:17 pm

    Gold represents discipline and restraint, unlike a fiat currency. Keynes thought the government is the solution to all economic problems and therefore gold is an unwanted hindrance to government. Keynes died before he witnessed the collapse of the Soviet Union, which represented government economic management.

    The historical facts are: governments lack discipline; they wage unnecessary wars, destroy valuable assets, confiscate citizens’ wealth and sacrifice their lives. The latest attempt to curb government, developed in the last one hundred years, was the system of central banks, which was to provide independence from government.

    Unfortunately, the system of central banks are finding difficulties in managing a global system of fiat currencies, based on the US dollar as the world reserve currency. Maintaining the integrity of the US dollar proved difficult for the US Federal Reserve, which is actually controlled by private interests.

    Historically, fiat currency systems have an average life-span of about forty years. The current one, starting in 1971, has lasted 42 years so far. It is looking more and more unworkable. It is possible that a new global reserve currency will replace the US dollar based on the SDR, which is similar to Keynes’ Bancor proposed, but rejected, at Bretton Woods.

    Gold will likely play a role in the new reserve currency to provide a necessary anchor. But in the long-run, gold is not the problem. The currency system is not the problem. It is Keynes’ idea of government that is the problem. Governments are simply structured to fail in most things they do. For the latest example, watch website developments in Obamacare in the world’s most advanced IT country.

    • Herb Wiseman
      October 28, 2013 at 11:27 pm

      Governments lack discipline? What a bizarre statement! Governments do the bidding of the 1%. That is why there was an American Revolution and then the Americans allowed the 1% through their corporations to run the show and convince the rest of us via propaganda (using the media they own) that there is a choice between political parties (there is but it is insignificant).

  5. paul davidson
    October 27, 2013 at 7:40 pm

    lyonwiss –for someone who claims to be such a great student of Keynes’s writings — you apparently do not know what Keynes said about a government of the Soviet union type in THEGENERAL THEORY.

    On page 378 Keynes wrote “I conceive, therefore , of a somewhat comprehensive socialisation of investment….by which public authority will co-operation with private initiative. But beyond this no obvious case is made out for a system of State Socialism. It is not the ownership of the instruments of production which is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic reward to those who own them, it will have accomplished all that is necessary.”

    Come on and get with it lyonwiss

    • October 27, 2013 at 8:03 pm

      That there is “no obvious case is made out for a system of State Socialism” is hardly condemnation. Obviously Keynes cannot explicitly support State Socialism, even if he wanted to and I never said nor implied that he did.

      The Soviet Union represented an extreme form of government economic management. There are clearly many different forms of government economic management of varying levels of government involvement, which are increasing everywhere as a result of the financial crisis.

      Paul you should exercise you own critical thinking on economics and on Keynes, as his words are not the economic bible that you seem to think.

  6. davetaylor1
    October 27, 2013 at 10:30 pm

    In this I agree with Paul: get with it, Lyonwiss. But take this as a challenge, not a put-down. Keynes not only recognised a bad thing when he saw it, he worked himself to death doing something about it more successfully than anyone else. You obviously don’t understand that governments and democratic processes governed by irresponsible financiers amounts to government by irresponsible financiers, and that that is bad; for you naively criticise the puppet show without doing anything to expose and cut the strings of the puppeteers. What’s up? Are you a puppet yourself, afraid to take a risk, or only using the unreal (linguistic) side of your brain? I suspect you are the type of person who in 1890 would have said pigs can’t fly, so we just have to make the best of steam-engine economics and engine-drivers. When you’ve shown you understand the development of flight, control theory and the reality of automation, or even that Keynes suggested half a dozen better solutions than government intervention for future clever clogs to reinvent for themselves, then perhaps I shall be more willing to value your judgement, as I still value that of Keynes. I will value your CONTRIBUTION more when, like Keynes, you have contributed something to the possibility of improving global well-being and social ethics.

    • October 28, 2013 at 12:16 am

      Get with what? It is rude and uncouth to attack the person. I’m critical of Keynes’ faith in governments, because governments are just people. If people are irrational or corrupt, then there is no reason why governments are not irrational and corrupt, as is evident today. The more powerful the governments (e.g. after the crisis), the less effective they are in managing for the benefit of all people.

      You admit that there are bad governments “governed by irresponsible financiers”? Then isn’t it a contradiction to trust such governments to solve your problems? Therefore “government” cannot possibly be a generic answer to specific problems. It is you and Paul who need to “get with it”, get with clear and original thinking. Do you want current governments to have more power or less?

      I do not need to speculate on how stupid your thinking is, so please do not attack your own speculations of others.

      • robert r locke
        October 28, 2013 at 5:15 am

        On this point I agree with lyonwiss (thread # 11). In 1998 I was asked to give a lecture in Groningen, on the 4th Lustrum of the founding of the business school: subject. “Social justice in a Free Market economy.” I accepted the idea that governments are irrational, corrupt and could not be relied upon to manage efficiently, So we rely on markets. But I said the problem is the mal-distribution of the reward earned from competition in the free market. My suggested solution: establish compensation committees in firms that represent stockholder and employee interest and let them decide who gets compensated and how much in the firm. That eliminates some ham-fisted government bureaucrat governing wages (the state) while at the same time controlling the propensity of director primacy driven capitalism to distribute rewards the firm earns to themselves. Nobody paid the slightest attention to the content of my speech, but they did laugh when I stepped back from the raised speaker platform and fell like Charlie Chaplin, just catching myself before falling on my ***. And I did it twice.

    • davetaylor1
      October 28, 2013 at 10:43 am

      Get with the REAL WORLD, Lyonwiss, in which governments are not just irrational and corrupt individuals, but institutions which systematically define the way we live. If you can grasp the reality that designers of almost perfect information systems have to live with the fact that most of their electronic components have a 20% tolerance on their design values, then you may come to see the significance of their designed arrangement. Government is still based on the self-fulfilling prophecy that government is a high power system from which power can be stolen, rather than a low power information system able to broadcast truth and eliminate [viral] lies before they damage the system.

      Keynes used what he’d got to change the system: persuading enough politicians of their responsibility for the poor, the young, the sick and the elderly, and enough business financiers that that was to their own advantage. It would be fairer to say he only half-foresaw cybernetics than that never made any mistakes, but he who never made any mistakes, never made anything. Which brings us back to my challenge to you, Lyonwiss.

      It was you who was rude and uncouth: rubbishing the reputation of a great (and even more importantly, good) man – and because you imagine he had FAITH in government?

      For goodness’ sake, Keynes knew government, finance, academia and the stock market system from the inside, because he had been a leading light in all four. He opted out of government because of its leaders’ stupidity at Versailles, and (relevantly here) his great work thereafter was a response to the effects of Churchill’s gold-standard idiocy.

  7. Herb Wiseman
    October 28, 2013 at 11:39 pm

    Just another comment about the cult of efficiency. How is it efficient to have mutliple insurance companies each with their own bureaucracy and shareholders to satisfy to manage health care with the overarching criteria to make a profit for the shareholders? Comparisions were made between similar sized states and provinces (in Canada) and the cost per patient was about half for the government-run services and pre-existing conditions didn’t matter in the provinces in Canada! Sorry I no longer can lay my hands on the data.

    This likely applies to other aspects of society too. How is it efficient for taxpayers to pay a portion of every tax dollar to private financiers when another option exists? In Canada we pay approx. $65 B per year in interest (all levels of gov’t) when the government owns its own bank — well we own it through them!

  8. July 30, 2014 at 6:10 pm

    I agree that if you want to make government smaller and bankers richer you should adopt the gold standard.Ask yourself what country in the world is still on the gold standard? Zero.There are reasons for that .

  9. F. Beard
    August 2, 2014 at 3:41 pm

    Inexpensive fiat is the ONLY ethical choice for the payment of government debts else the authority and power of government is used to benefit private interests such as gold owners. That’s fascist.

    Caesar is to be paid with Caesar’s money (Matthew 22:16-22) and that money should be as inexpensive as possible given durability requirements and counterfeiting concerns. Gold and silver are now obsolete since less expensive methods do the job just as well if not better.

    Grow up gold-bugs. Ethics is the key to proper money creation, not shiny metals!

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