Thursday, February 16, 2012

Ramesh Ponnuru, Ron Paul, and the Gold Standard

Ramesh Ponnuru has a new article on Ron Paul's monetary economics.  It is a great read throughout that highlights some of the problems with Ron Paul's views.  Among other things, Ponnuru explains many of the well-known problems of the gold standard and its role in making the Great Depression so great.  Here is an excerpt (my bold):
Representative Paul’s strategy for dealing with the theoretical and historical arguments against the gold standard in End the Fed is to ignore all of them. All he says is that problems arose in the 1930s because of the “misuse of the gold standard.” But note that the great advantage of the gold standard is supposed to be that governments cannot manipulate it. Concede that they can and the argument is half lost.
That is an important point.  If the interwar gold standard did not work because France and United States were not playing by the rules of the game, why do we think countries would be any better behaved today?  Would the U.S. political process really be able to tolerate the requirements of a gold standard?  I do not see it happening.  This is especially true if the gold standard covered an area that was not an optimal currency area.  Look no further than the current Eurozone crisis or the UK  leaving the European Monetary System in 1992.  Both demonstrate how difficult it is to maintain a fixed exchange rate monetary system when internal economic concerns conflict with external ones.  

P.S. Kurt Schuler probably will not be happy with this post of mine either.  

P.PS.  George Selgin proposes an innovative solution to some of the gold standard problems in his quasi-commodity standard.

6 comments:

  1. David,

    Here's a dilemma I grapple with:

    When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers .

    This is true throughout the course of human history.

    Would you agree that the dilemma is real? Would you also agree that the real conflict between Ron Paul's stance and other politicians is simply a conflict between debtors and savers?

    If so, then we should probably go for a system where the medium of exchange (currency) which facilitates the flow of value to be completely separate from the *thing* that actually stores value (which is gold).

    Remove all shackles and shenangians of the gold market and let gold flow freely across borders. Let each country manage its own currency and a country that produces more and consumes less will automatically see prices decline and gold priced in that country's currency decline as well.

    If a country overconsumes, then gold price will increase in that country's currency acting as a barometer of fiscal health.

    Terminal imbalances, ridiculous trade deficits, exponential and pathological speculation: all of these can be eliminated with a simple idea: Recognizing this conflict.

    Your thoughts?

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  2. Oh, P.U. to the gold standard. Let's discuss reasonable topics.

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  3. ephemeral_reality
    ?? Huh. I'm sort of wondering what is different with what you want and the status quo.

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  6. @reason

    Proof that central banks routinely engage in manipulating price of gold. You can obviously read more here

    IRS designates gold as a collectible and taxes capital gains at 28% (even long term).All these capital controls and price suppression should end for gold to be *really* free.

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