Friday, October 24, 2014

Larry White’s Baffling Interview on the Gold Standard

By Joseph Salerno
In his recent three-part interview (herehere and here) on the gold standard, Larry White perplexes almost as much as he enlightens.  Let’s critically review  his responses to a few of the interviewer’s questions.
First, when queried about evolution of the discussion of the gold standard among classical liberals including Austrian economists as well as in academia more broadly, the general literature, and policy institutes, White expresses general optimism.  He concludes his answer with some observations about policy institutes:
Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience.  The Heritage Foundation is now showing some interest.  The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.
A glaring omission in White’s answer is, of course, the Mises Institute, which held its first conference on the gold standard over 30 years ago.  Since that time it has campaigned tirelessly for the gold standard, devoting many of its conferences and publications to sound money.  Its associated academic economists and other scholars have published thousands of pages on the subject.  The Mises Institute has also served as the main intellectual support for Ron Paul, surely one of the most popular and influential  defenders of sound money as a U.S. Congressman and now as a public intellectual.  The Mises Institute continues to shape the debate on the gold standard.  In fact just today. RealClearMarkets, a website owned by Steve Forbes, published a response by economist and Arthur Laffer disciple Marc Miles to a critical review of Steve Forbes and Elizabeth Ames’ book Money: How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About It  written by Mises Institute scholar David Gordon.
Remarkably, while ignoring the Mises institute, White finds it fitting to recognize the obscure Gold Standard Institute.
The Gold Standard Institute was founded and is presided over by Keith Weiner, a principal in a for-profit gold fund business.  Weiner received a PhD from the New Austrian School of Economics (NASE), a non-accredited institution founded by Dr. Antal Fekete, a mathematician and a proponent of the gold standard based on the  long discredited real-bills doctrine.
Moving on, when asked if he was familiar with Nathan Lewis’s Gold, The Monetary Polaris, a book he commented on at a Cato monetary conference, White answers:
I offered a few academic quibbles, but the book does a good job marshalling historical evidence to demonstrate the chief merits of a gold standard.
White’s response here is another head scratcher.  It is true that Lewis’s book does provide a valuable historical discussion of different monetary regimes involving gold.  However the analytical part of the book is a mess.  Lewis is not in favor of a gold standard in any meaningful sense of the term and does not even have a clear idea of what the gold standard actually is.  He  treats the “gold standard” as a deliberate invention of government policy, what he calls a “a fixed-value system with gold as the policy target.” For Lewis,  all historical varieties of the gold standard are simply price-fixing schemes in which the monetary authority targets the currency price of gold that it has chosen as the parity .  Indeed under Lewis’s so-called  ”no gold” gold standard, the money manager neither buys or sells gold at the parity price nor  holds any gold reserves.  Rather it “targets” the price of gold by buying and selling bonds.  It may even buy or sell “fine art” to target the gold price.  Furthermore,  Lewis does not view the gold standard as supplying an inherently scarce commodity money.  Rather he sees the gold standard as a clever device for constraining the  ”currency manager” to ensure that the supply of currency, i.e., “banknotes with no intrinsic value,” remains artificially scarce and therefore valuable.  Of course, Lewis’s view is preposterous because it puts the cart before the horse.   A thing could never become money in the first place unless it was an item that was already scarce, valuable, and had a price in terms of other goods and services against which it was actively traded.  Thus bank notes could never come into existence except as claims to an existing , scarce commodity like gold.  No governmental bureaucracy is needed to ensure that money remains scarce.
Lewis also maintains that gold possesses an intrinsic, constant value and therefore serves as an absolutely fixed  ”measure” of value for other goods and services.  Lewis pushes this absurd view to its logical conclusion by calculating “the equivalent gold value of labor,” which he believes more accurately reflects the variation of real wages over time than conventional indexes of real wages based on the fiat dollar.  His calculations using gold as an alleged unit of constant value indicate that annual real wages declined by 86% between 1970 and 2010!  Lewis’s views on money and banking are just as bizarre.  Thus he asserts:
U.S. banks today don’t actually ‘create money’ or ‘reduce money’. . . . They create and reduce credit.  ’Credit’just means a loan of some sort.
I could go on, but given the gross misrepresentation of the nature and function of the gold standard and of money in general that one finds in Lewis’s book , it is hard   to imagine that White could only summon up “academic quibbles” with it.
Finally, when asked about the critics of fractional reserve banking, White responds by falsely implying that all critics of fractional-reserve banking want it outlawed.  By doing so, he deftly side steps the serious criticisms of theeconomics of fractional-reserve banking by those advocates of free banking, such as Ludwig von Mises, Guido Huelsmann, myself, etc.  who are in favor of freeing banks from all political regulations while denying them government bailouts and insurance.  These latter critics believe that a completely free market in banking will lead to the natural suppression of “fiduciary media”, i.e., bank notes and deposits unbacked by the money commodity.  But  White cannot be bothered with addressing such nuanced  arguments when there are  polemical points to be scored with a gratuitously nasty gibe:
 I’ll just say that those who want to outlaw modern intermediation (and by modern I mean post-Dark-Ages), and build our payment system instead on literal gold warehousing . . . It’s a kind of financial Luddism.
I should have thought that such a well versed economic historian like White would be familiar with the Dutch Golden Age, which occurred long after the Dark Ages.  The Dutch had the most prosperous economy and the highest standard of living in Europe from 1600 to 1820.  And they accomplished this feat without “modern intermediation,” by which White means the creation of notes and deposits by commercial banks.  Dutch financial and monetary institutions were strictly separate.  Merchants,and businesses obtained finance via bills of exchange and by selling shares and bonds on the Amsterdam Bourse, the oldest formal securities market in the world.  Deposit keeping, payments, and foreign exchange services were provided by the 100-percent reserve Bank of Amsterdam.  Finance did not create money and money creation did not dissemble as finance
As for financial Luddism, I would think that charge is better leveled at someone who forecasts that a hybrid monetary/financial arrangement which might have thrived in circumstances peculiar to 18-century Scotland would just happen to be the type of arrangement that entrepreneurs in the 21st century would rediscover and implement when modern money and finance is completely separated from government.
The above originally appeared at


  1. Lo and behold, almost on cue, or via a judiciously applied Google Alerts setup, Selgin appears to spar with Don Salerno...

  2. Dr. Salerno denounces the "long discredited" real bills doctrine, but then appeals to the "bills of exchange" of the Dutch Golden Age as the gold standard alternative to fractional reserve banking. Real bills and "bills of exchange" are the same thing.

    In short, Dr. Salerno was pissed that Fekete got credit as promoting the gold standard intead of the Mises Institute. However, Fekete was promoting the gold standard at Volker's seminar at Princeton University in 1974, almost a decade before the Mises Institute was even founded.

    Fekete represents a branch of the Austrian school of economics that follows the Austrian school's founder, Menger, in advocating the Quality Theory of Money over Mises's Quantity Theory of Money.

    The difference is a relatively small one compared to Keynesiansm. However, in academic circles the most minor disagreements between parties with almost identical beliefs are the fiercest of controversies.

    This article helps sort out what real bill doctrine really means: