Wednesday, October 15, 2014

Gold Standard is no cure


Why is the Gold Standard Urgent?  by Keith Weiner
This good well-reasoned article ends with a logic failure and leap to an unsupported conclusion.  
Weiner writes:
"When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?
"... What happens when an entire society doesn’t save?
"Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.
"The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.
"There will be no recovery while our monetary cancer rages, unchecked...."
Well put. Very well put.  But then he jumps to:
"We must rediscover the gold standard, which is the only cure."
Not so clear. I know, there are theoretical arguments that this should work, but what does the historical record show?
The founding of the Fed was not just simply a criminal conspiracy.  It took place during the 30-year "Long Depression" that began in the 1880's and ended with World War I, an economic and social crisis that saw the rise of populist, labor and mass socialist movements throughout the world including in the US.  By the time the smoke had cleared from that crisis, most of the old Russian Empire had repudiated capitalism and Germany had nearly followed suit.    
The next big lurch into fiat currency occurred during and just after the Great Depression, beginning with Roosevelt's confiscation of private gold holdings and crowned by Bretton Woods.  That crisis ended with the Soviet Red Army occupying Eastern Europe and Berlin, communist-led movements overthrowing old colonial empires, and the "fall of China".  By 1955 the terrified global bankers were hiding behind the threat of a world-destroying nuclear armageddon to save their system and their skins.  
The final lurch into a fiat currency world began during another profound system crisis in the 1970's, at a time when world capitalism appeared to be lurching back into depression. A depression my professors in the '60's swore could never again happen and would never again be allowed. The response was the final unpegging of the dollar from gold, followed by the unleashing, step by step, of what became today's de-regulated, financialized bubble economy, where money flows like water from the Fed, the central banks and great banking houses, where "value" and "price" have been fully conflated. 
Seen apart from this historical context, the rise of central banking and fiat currency can be modeled as simply a criminal conspiracy.  But in historical context, it appeared as a succession of apparently successful emergency responses to emerging systems failures.  But if that is how we should understand it, then it is hard to see how fiat money could be the root problem of the crisis, or how reverting to the gold standard could be the cure.
Which is not to say that gold won't play a key role in the global drama that's unfolding.  I'm just saying that it's illogical to jump to the conclusion that reverting to a gold standard alone could fix a crisis that predates and perhaps precipitated its abandonment.  
If we conclude that some underlying condition, problem or set of problems must have been driving the system into depression and mass unemployment over a century ago, and if we conclude that is what must have forced our grandparents' and great grandparents' generations to abandon the gold standard, then we should assume this underlying problem or condition must still be there waiting for us.

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