Monday, April 15, 2013

A Tutorial on Money, Gold and Inflation for Paul Krugman

By Murray Sabrin

In his New York Times column, Lust for Gold” (April 12), Paul Krugman embraces once again monetary inflation as one of the ways to create prosperity, one of the longest enduring myths in economics.  By disparaging gold as money, Krugman also reveals his lack of understanding of monetary economics.  In addition, Krugman’s support for deficit spending, also puts him in the camp of George W. Bush, Dick Cheney, who said “deficits don’t matter.”  In short, Krugman as well as Republican politicians just cannot get enough of the welfare-warfare state.
Krugman writes, “…historically, gold has been anything but a safe investment.”  However, in 1968 gold was $35 per ounce; you could buy a brand new automobile for about 80 ounces, or $2,800.   Today, at $1,500 an ounce, you need only 20 ounces of gold to buy a brand new $30,000 automobile. In over four decades, gold has increased in purchasing power while the dollar has declined in purchasing power.  This is just example of many how gold has maintained its purchasing power over time.
So what is Krugman saying about gold that it is not a “safe investment?” Its purchasing power has increased while the dollar’s has plunged since I graduated from college.  Is Krugman implying that gold is not safe because the government has and could confiscate the yellow metal, as FDR did 80 years go this month?  And in 1971, President Nixon defaulted on the dollar when he closed the gold window when he told foreign government and other “official” holders of gold that the United States would not honor its commitment to redeem dollars at $35 per ounce.
Yes, gold is not “safe” when the people have to rely on the integrity of government officials to honor their commitment to be good stewards of a nation’s monetary affairs.
As far as returning to a gold standard, Krugman quotes his idol, John Maynard Keynes that the gold is a “barbarous relic,” with a link to the alleged deconstruction of gold as a reliable monetary standard.
Compare Keynes conclusion that gold is an artifact of barbarians with Ludwig von Mises’s insights about the opponents of the gold standard and how gold money leads to a check on government spending running amuck.
“The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.”
So one reason Krugman and other modern monetary cranks love paper money is simple:  the central bank can create money out of thin air to buy government bonds when the national government spends more than it taxes the people so the public can have its cake and eat it too, a bigger and bigger welfare-warfare state without paying higher taxes.
Mises also explained how the international gold standard advanced western civilization.  “The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another.”
Why did governments abandon the gold standard?  Mises showed it was a deliberate policy to remove the last safeguard against money printing.  “The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion—policemen, customs guards, penal courts, prisons, in some countries even executioners—had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium.”
In short, governments are inherently violent, using any means necessary to achieve their goals, welfarism at home and war overseas.
Mises also zeroed in on Keynes’ alleged brilliance when he wrote this more than five decades ago, “The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the ‘deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.”  In other words, money printing tends to undermine an economy’s supply of capital goods, which reduces its ability to produce goods for the masses.
Krugman has taken up Keynes’ mantle, as the foremost “monetary crank”–a pro money printing, pro deficit spending, anti-savings advocate in the world– who asserts that prosperity is the result not of savings and investment but by government boosting “aggregate demand” of the people, i.e., inflating the supply of money.
Mises observed, “Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.”  And Mises wrote this more than 70 years ago!
Inflating the supply of money creates winners and losers.  That is the reality of the Federal Reserve’s Quantitative Easing policy, another benign sounding program that reduces the standard of living of most Americans at the expense of the financial elites who are cheerleaders of easy money.
Meanwhile, Krugman knowingly or unknowingly has become the nation’s leading apologist for the welfare-warfare state.  As Mises pointed out that the proponents of the gold standard, “The gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called ‘sound money.’ ”
The dollar’s purchasing power has declined more than 95% since the Federal Reserve was created nearly 100 years ago.  The purchasing power of gold is relatively stable over the long run.  But Keynes famously said, “In the long run we are all dead.”
Mises responded:  “A dictum of Lord Keynes: “In the long run we are all dead.” I do not question the truth of this statement; I even consider it as the only correct declaration of the neo-British Cambridge school.”
By continuing to quote his cultish idol, John Maynard Keynes, Paul Krugman is clearly the latest member of the hall of defunct economists.
Dr. Murray Sabrin is Professor of Finance in the Anisfield School of Business at Ramapo College of New Jersey.  He has been a member of the faculty since 1985. 
The above was republished with  permission.  You can visit  Dr. Sabrin's web site here. 


  1. I am pretty sure that what Prof. Krugman was referring to when he called gold "not a safe investment" are days like today. Today gold lost 10% of its purchasing power. You write in the article that today gold is at $1,500 per ounce. Actually it's about 10% less at $1,350.

    You write, "This is just example of many how gold has maintained its purchasing power over time." Today is an example of many over the last forty years showing how people investing in gold lost quite a bit of purchasing power.

    Had the US been on a gold standard over the last decade we would have seen a period of price deflation and today (in just one day!) a jump in prices by 10%. How is that stable?

  2. The "gold price" reflects not the price of the real physical gold, but the price of gold futures and other "paper" gold which does not exist in reality.

    This is a highly manipulated market, and there's little wonder than the prices are fluctuating wildly. However, even highly manipulated markets will have eventually to get back to fundamentals. And the fundamental facts about gold are that its supply is limited and that it is universally recognized as valuable in all human cultures, and has been so recognized for thousands of years.

    Besides, when you're talking about 10% jumps a rational person would assume that it is the price of paper money which is volatile, since its supply has no physical constraints and because it is easily converted to and from other paper assets, so things like selling securities and massive need to cover margin calls create spikes of demand.