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Anti-Gold Fool

Gary North
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Sept. 6, 2012

David Weidner wrote a piece for MarketWatch: "Fool's Gold Standard."

It was standard stuff, i.e., a combination of economic stupidity, attempted cleverness, and the rhetoric of contempt.

It deserves my special treatment, which I reserve for mainstream media journalists who hate the idea of a world not run by the Federal Reserve and who try to be clever. Weidner is not clever.

Let me explain. I quote him verbatim and in context.

He begins with this:

Every few decades the nation has a financial panic, and in doing so questions its mode of currency. Should we be on a gold standard, or not?

I ask: Why does the nation continue to experience these panics? Also, when? I recall no financial panic comparable to 2008 in the past 70 years. There was the S&L crisis of the mid-to-late 1980s. Government regulation of the industry caused this crisis.

Let us review chronology. Jesse Helms in 1980 called for a gold commission to study gold. A Democrat Congress passed it, and Jimmy Carter signed it. It was held in 1982, four years before the S&L crisis began. It was a dead issue by 1986.

Also, no one in Washington suggested a return to gold in 1982, other than Ron Paul. No one suggested it in 2008, other than Ron Paul.

So, the article begins with a false premise: a supposed relationship between financial panics and calls for a gold standard.

There was price inflation, 1971-1980, but no financial crisis. That decade of price inflation was the result of the policies of the Federal Reserve System under Arthur Burns and G. William Miller. Those policies resulted from Nixon's unilateral killing of Bretton Woods on August 15, 1971. He killed the gold exchange standard, itself a Keynesian imitation of the post-World War I gold exchange standard (1922 Genoa Conference), itself a government-manipulated counterfeit of the pre-World War I gold coin standard, which had ended in 1914.

This post-financial crisis era is no exception. The Republicans have just put a plank in their party platform that called for the formation of a gold commission, a move that's generating some buzz on Wall Street.

It is generating no buzz anywhere. The platform is taken seriously by no one, especially Speaker of the House John Boehner. It merely reflects that Ron Paul scared the Republican Establishment this time. He did not in 1982.

What would adopting a gold standard accomplish?

We've just come through the worst recession since the 1930s. It's healthy that we are challenging our monetary System, our fiat currency and the Federal Reserve system.

Who are "we"? No one on Wall Street. No one in the mainstream media. No one in Washington, other than Ron Paul, who is retiring. Weidner knows this. He is trying to tar & feather him, once and for all.

But if anything, these cyclical crashes only underscore what a folly this is. Reinstitute the gold standard? Please.

Is this what people are doing now that Ron Paul is out of politics?

Not enough people.

Look, let's acknowledge what adopting a gold standard would do:

• It would guard against inflation by linking currency to something in fixed supply.

• In doing so, it would lessen government's ability, through the Fed, to manage wealth. That's because inflation effectively shifts wealth from citizens, who can't print money, to the government, which can.

• It would effectively fix international exchange rates -- something that could potentially help us in our imbalance with China and other countries that have gamed the foreign exchange system to their advantage. (China would suffer inflation, U.S. deflation making our goods more competitive.)

This is all true. So far, nothing else has accomplished this in history. Bretton Woods worked only when there was a gold-exchange standard (1946-1971).

So, he knows what works. But then he offers reasons why not -- Really Dumb Reasons.

It all sounds wonderful, of course, until you consider the downside:

• Deflation is a necessary part of a currency on the gold standard. It absolutely crushes debtors. That's why politicians talked about the standard nailing people to a "cross of gold." When you owe money and your wages fall, you may be able to buy the same things at lower prices and maintain a quality of life, but your debt gets bigger.

It "absolutely crushes debtors." I see. So, from 1879 to 1933 in the USA, there were no debtors. They all were crushed. I had not heard this before.

What kind of rhetorical nonsense is this?

The gold coin standard was restored in 1879. The system had been abolished in the early months of the Civil War, in order to allow mass inflation of the currency to pay for the war. There was a bond market, 1879 to 1933 in the USA. Businesses issued them. So did governments. Banks lent money. How? To whom, after the debtors were "absolutely crushed"?

Weidner must figure that his readers are economic imbeciles.

• As a result, it would have a dampening effect on the credit markets.

I see. Yes. If all debtors were "absolutely crushed," this would have a dampening effect. But there was no such effect. The period 1879 to 1933 was the golden age of bonds.

• The government would have little power to do any managing of the economy. It couldn't set the price of gold, or pump money into the economy by expanding the money supply as the Fed does today.

This is the heart of the matter. Anti-gold writers -- 99.9% of all financial writers -- love the FED and the government. They love the central planning of money.

Now, I don't want to entirely discount the benefits of the gold standard. The system would do much to solve the problem of debt bubbles and trade imbalances.

Correct with respect to debt bubbles, though not with a central bank to protect the largest banks, as the FED did, 1930-33. As for trade imbalances, they would continue for as long as foreign central banks inflated their currencies to promote mercantilism: subsidized exports. This is a subsidy of American consumers. I enjoy being the beneficiary of economically stupid government subsidies as much as the next guy.

A big problem is that the gold standard never works. It's like getting back together with that old girlfriend. Your memories of how good it used to be are tainted by your current pain of loneliness. I get it. The pull is very, very tempting. But haven't we gone down that road enough already?

"Your memories of how good it used to be. . . ." To have a memory of the last year of the gold coin standard economy in 1933, you would have to have been born in 1913. And the memories, if any, would not be pleasant. To recall the good old days -- 1922-29 -- you would have to have been born in 1900. This is not an argument. This is silly.

Another problem is that rather than try to improve our currency systems, we keep going back to this 600 B.C. technology that's a step up from seashells. Gold is pretty, but it's just a piece of metal. Its uses are limited. It can be dug out of the ground. In other words, it's really all about human confidence that gold is worth something. And, you know, the earth is flat too.

First, there has only been one sustained period of stable money in man's history, the Byzantine Empire, 325 A.D. to about 1028. After less than a century of debasement, the Byzantines returned to the high-content gold coins of the earlier era. There was no inflation until the fall of the empire to the Ottoman Turks in 1453. He either does not know this or else he conceals it.

Second, as to the flat earth, this is the rhetoric of contempt. It is based on appalling, though common, historical ignorance on his part.

Classical Greek scientists knew that the earth is round. Medieval scientists did, too. Anyone on the seacoast who could see the white sails of a ship appear before the body of the ship was visible knew the earth is round. The story of the flat earth as a medieval myth was invented by American novelist Washington Irving in 1834. The proof of this was provided in a 1991 book by medieval historian Jeffrey Burton Russell. His book is as close to universally accepted by scholars as any historical book is: Inventing the Flat Earth: Columbus and Modern Historians. You can read his own synopsis here: http://www.veritas-ucsb.org/library/russell/FlatEarth.html. (He taught me medieval history, 1965-66, for my M.A. degree. He had read my B.A. thesis in 1963, which turned into a 1,300-page book in 1996. I sent him a copy, apologizing that it was late. He replied that he it was his policy to deduct one full grade for every decade that a term paper was late.)

There's one more thing that bothers me about the gold standard people. They always seem to be of the same economic and political stripe. They are anti-government libertarians who are hell-bent on ending the Fed, shrinking government and letting "free markets" rule.

Guilty as charged!

I was reminded of this last week when Seth Lipsky, writing in The Wall Street Journal, argued that gold was coming back to the mainstream. He then went on to acknowledge that all of the people who were against it -- Anna Schwartz, Ronald Reagan, Milton Friedman -- would probably have been for a gold standard if there wasn't an overwhelming public, political and economic crowd of voices against it.

Friedman and Schwartz built their reputations on a defense of fiat money and an attack on the gold standard. To suggest otherwise is to suggest nonsense.

Moreover, many gold-standard enthusiasts always seem to be gold bugs themselves. They're deeply invested either financially or ideologically in the idea. Talking about it helps their portfolios, their careers and their self-esteem.

So what? Many advocates of the Federal Reserve seem to hold dollars. Many advocates of the U.S. government hold T-bills. And so on.

After driving across the country and seeing the devastation the financial crisis -- one caused by a credit bubble fueled in part by the Fed -- like most Americans, I'm angry and willing to try a radical approach. But I'm not willing to repeat mistakes.

If he has written anything of systematic substance on an alternative to the FED, I have not seen it. Until he does, he is not willing to try anything radical. Neither is anyone else in the mainstream financial media. They are knee-jerk FED acolytes.

Without a compelling new argument, this discussion should really end there. If investors want to buy and sell gold because they believe it has value, that's their choice. But to make this faith-based metal our national currency?

You'd have to be a fool.

I say: "It takes one to know one."

He knows the good side of the traditional gold standard, but when he offers arguments against it, he sounds like either an economic imbecile or a self-conscious deceiver.

This is standard operating procedure in the mainstream financial media.

We are competing against intellectual incompetence. Their support of the Federal Reserve robs them of their ability to think straight.


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