Monday, August 27, 2012

Sound Money Solutions

By Chris Rossini

Slate's Matthew Yglesias comments on the GOP's platform inclusion of a Gold Commission. I'm not excited either, but for entirely different reasons than Yglesias. He writes:
Commodity-backed money is basically a solution to a non-problem. Or at least it's not a problem you have if you don't accept a Randian deeply moralized view of market outcomes. The existince of fiat money is embarassing to that kind of ideology, so it inspires quests for alternatives to modern central banking even when the alternatives don't make sense.
My argument is the exact opposite - commodity-based money solves many HUGE problems!

Here are a few of the majors:
  1. Central Bank inflation dilutes the purchasing power of every dollar held prior to the inflation - Imagine owning a Mickey Mantle rookie card. You wake up one day to news that another million have been discovered in an old dingy basement. The card you own, which you were going to someday sell to buy a new car, can now be given to your dog as a chew toy. The same laws of supply and demand apply to money. Every fiat money in history has ended as the equivalent of a chew toy.
  2. Central Bank inflation creates an exchange of nothing for something - The Fed can print dollars at practically zero cost, and then purchase any real asset that it wants with them. It also pays real debts with them, buys politicians, economists, foreign leaders, etc. The Fed puts the saying "everyone has a price" into practice regularly.
  3. Central Bank inflation creates a casino economy - We're all very familiar with the fact that you earn virtually no interest by keeping money in the bank. This artificial situation acts as a catalyst for individuals taking their money and gambling it in the stock market, "investing" in houses they can't afford, etc.
  4. Central Bank inflation punishes savers - Savings and the formation of capital are the foundation of human civilization. Central Banking takes a sledgehammer to the market's unbiased efficiency in allocating resources to where consumers desire them most. In other words...
  5. Artificially low interest rates are the poison that set in motion the boom/bust cycle.
According to Yglesias, these are non-problems!

Not only is he grossly incorrect, but here are the solutions to the 'non-problems' that commodity-backed money would provide (using gold as the example):

The purchasing power theft problem would virtually disappear. Unlike digital dollars, gold cannot be created by typing zeros into a keyboard. Gold is very capital intensive to mine, and even after gold is discovered it takes years to actually open up a mine. Should a situation occur where the mother of all gold discoveries takes place, the market would be free to adapt and use the next most marketable commodity as money.

The financing of wars, buying off politicians, foreign leaders, and economists would be much harder. For the authorities would have to first tax the gold away from the populace. Not so easy. Typing zeros is much more fun, and as Keynes pointed out: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Finally, market interest rates would serve as the balance in the allocation of capital. When savings are plentiful, businesses can have some assurance that the time is ripe to begin long-term projects. When savings run low, interest rates would naturally rise, choking off the chance of economy-wide manias.

Higher rates would encourage people to save instead of taking their money and betting on the Wall Street ponies. The elderly and those on fixed incomes would no longer be arbitrarily punished by the heralded "maestros".

So, Yglesias has the whole thing backwards, and being that gold has been (the market chosen) money for thousands of years, it is fiat money that is the 'alternative' to real money.

An alternative that is failing on a worldwide scale for all to see. 


  1. Yglesias has been attacking Austrians for years.

    Coincidentally (as with all other anti-Austrians), he knows absolutely nothing about the topic.

  2. I would like him and thousands of other functionally stupid MBA's to explain that if gold is useless as money, then why have central banks increased their holdings so much?

    Some will want to play word games and tell me its an 'asset' though none can explain why Indian Rupees or Mexican Pesos are not stocked instead as as an 'asset'.