We Don’t Need No Stinkin’ Gold Standard

France, Germany, the European Central Bank, Russia, India, and China are all much more favorable toward gold as a reserve asset than is the United States. They have shown this through their actions in holding or adding to their gold reserves. China has promoted gold as an investment. Although they have not spoken openly of gold, they are moving toward the increased importance of gold in the international monetary arrangements.

In other words, they are aiming at some version of a gold standard. The idea seems to be to go back to a pre-1971 system while bolstering the roles of the IMF and the BIS and reducing the dollar standard to a standard of a basket of currencies linked to gold.

The idea is to prolong the life of national central banks and fiat currencies by a gold linkage.

This, I say, is something we don’t need. We don’t need no stinkin’ gold standard that is another version of government-controlled currencies, accompanied by government suppression of monetary freedom and privately or market-produced money.

What we need is market-produced money. This may take a number of possible forms, such as e-money backed by metals such as silver and gold, or silver coin, or gold coin and bullion for larger transactions.

Market-produced money differs radically from government-controlled and government-produced money. With market-produced money, there cannot be a systematically injurious deflation or harmful shortage of money. If the demand for money exceeds the supply to the point where the costs of a money shortage to demanders are exceeding the costs of producing more money, the market will produce more money and eliminate the shortage.

By the same token, with market-produced money, there cannot be a systematically injurious inflation or excess of money. If the supply of a money exceeds its demand at a given price, the market will reduce the supply and demanders will seek alternative money, thereby eliminating the excess demand.

With market-produced money, variations in the demand and supply of money will be of no greater consequence than the analogous variations of any other of the thousands of goods and services that the government does not control and whose prices are market-determined.

With market-produced money, there cannot be a money-caused business cycle of any substantial consequence, because prolonged alterations in money supply and interest rates caused by government control of money will be absent.

This means that with market-produced money, we can say goodbye to unemployment caused by business cycles induced by government mismanagement of currencies.

The Great Depression occurred at a time when the gold backing of government money was extensive. The current hardships are occurring at a time when gold is far, far less important in America’s monetary system. The common feature of these large depressions is not the presence or absence of gold backing. It is the presence of government-controlled money, with or without gold backing.

The most common meaning of "gold standard" associates this term with government-controlled money, not privately-produced money. This is why we don’t need no stinkin’ gold standard.

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Inflation: A Political Phemenom

In 1963, Milton Friedman and Anna Schwartz wrote "Inflation is always and everywhere a monetary phenomenon." The thrust of this statement is that inflation is caused by unsound monetary arrangements – not by those who are raising prices or asking for higher wages, and not by oil speculators or by dealers in foreign exchange. This statement was made at a time when blame was being placed for inflation on groups in society.

This statement focuses attention on the monetary role in inflation. It suggests that to have sound currency arrangements and avoid inflation as well as deflation, a society has to have sound monetary arrangements. This is true...

Inflation is not only a monetary phenomenon. Inflation is a political phenomenon. What is more, inflation is intractable because it is a political phenomenon.

Inflation has gone on now in most countries for decades. It is moving into a new stage in the U.S., a more virulent stage. The U.S. government is running a deficit this year that is, as a percentage of its expenditures, about as large as several Balkan countries that experienced hyperinflation after World War I. The U.S. had large deficits during World War II, and that set off a substantial post-war inflation. Another such inflation is baked in the cake.

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My thoughts: Expect double digit inflation.

The Fed: Falsehoods and Myths

Among other false items, which are too numerous too list in their entirety:

• The federal government in Washington is an essential agent in providing economic security and stability for the country as a whole. False.
• The entire economy of the country can be beneficially manipulated through macroeconomic policies devised and executed in Washington. False.
• Americans cannot be trusted to operate the price and market system on their own. They need constant supervision and regulation (from Washington) of almost every element of economic activity. False.
• The economic activity of Americans needs constant correction and adjustment by Washington (as to consumption, saving, employment, interest rates, investment, production, credit, liquidity, mortgages, etc.) False.
• Americans cannot be trusted to produce money and credit on their own. They need Washington to do this. False.
• The country’s economy is unstable and needs constant control and guidance from Washington. Otherwise, recessions and unemployment occur that Americans cannot themselves correct. False.
• Economic stability requires an overall monetary policy stemming from Washington. False.
• Americans are unable to produce a stable price level (to the extent that such a thing is measurable). They need the FED to do this for them. False.
• Maximum employment is a socially optimal objective. False.
• The federal government and the FED do not create economic instability and insecurity. False.
• The federal government and the FED are capable and adept at moderating and alleviating economic instability at little or no cost. False.
• Exceptional performance of the economy, when it occurs, is due to the skill and wisdom of Washington’s economic policy makers who successfully manipulate Americans into behaving in their own interests. False.
• The FED has had success in producing price stability and moderating the business cycle. False.

Myths:

Myth #1 is that its inflation offsets the negative economic effects that are occurring. Their theory is that the costs, if any, of inflation are lower than the benefits.

Myth #2 is that the FED’s loans offset economic problems by providing liquidity to the private sector and supporting credit extensions.

Myth #3 is that the FED promotes systemic stability by supporting such institutions as AIG, Citigroup, Fannie Mae and Freddie Mac.

Myth #4 concludes by saying that the government has an interest (on behalf of the public) in supporting the systemic company when it has troubles.

No part of Myth #4 is true, and every part of it is inconsistent with a free market economy. Either one has a market economy or one has state socialism or fascism. There is no middle ground, for the reason that when the government becomes a player in any given market, the fundamental character of that market disappears.

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My thoughts: Bread and circuses will keep the American people occupied until we run out of bread and circuses.