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Lehrman on gold

Tyler Cowen's recent post on the resource costs of gold prompts me to write about two books on gold by Lewis Lehrman, which I have been meaning to do for some months. (See George Selgin's remarks in the comments section of Cowen's post. Also relevant is W. H. Hutt's idea decades ago in his book The Theory of Idle Resources. Apparently idle resources very often perform a function simply by waiting in readiness, as a book on your shelf does even if you have not read it yet, or even if you never read it.)

Lehrman has been a longtime advocate of the gold standard and has used his considerable wealth to help make the case through an institute that bears his name. The two books in question are The True Gold Standard (2nd edition, 2012) and Money, Gold, and History (2013). The former is a single sustained argument supplemented by a number of appendices, while the latter is a collection of old writings with some new material mixed in, arranged so as to show facets of the running argument for the gold standard that Lehrman has made for many years. The books are aimed at a broad general audience and should be read and understood in that spirit, not as if they are academic writings aimed primarily at influencing the half-dozen most highly regarded specialists in the field–although Lehrman obviously would not mind reaching them, too.

The basic argument of the two books is that (1) the Bretton Woods version of the gold standard had flaws, but (2) abandoning it was a bad mistake because what came afterwards was even more flawed, so (3) it is desirable to return not to the Bretton Woods version of the gold standard but to the more robust classical gold standard, and (4) it is feasible for the United States to do so alone or with other countries, according to (5) a proposed course of action that Lehrman offers.

If you have read a number of my posts you probably already have a sense of what I am going to say, so I will be brief.

Virtues: The books are clearly written and well suited for their intended audience. The distinction between the classical gold standard, in which the major economies all relied on their own gold stocks for reserves, and the interwar and Bretton Woods systems, which were gold exchange standards, is crucial, and Lehrman stresses it. A gold exchange standard is more fragile than a gold standard in the sense that if the gold-standard country one is linked to abandons gold or devalues, a gold exchange standard country faces more pressure to do likewise than it does if it hold its own gold reserves, which have retained value. Lehrman reviews how gold did not impede some of the most vigorous growth the U.S. economy ever had, in the 19th century. He answers a lot of the questions people would have about the specifics of returning to a gold standard. In The True Gold Standard, he offers a nod to free banking as an eventual possibility (page 104). He also repeatedly stresses that the analysis is a question of comparing realistic, historically tested systems, and choosing a "least imperfect" system, not pretending that either a gold standard or fiat money is a perfect system.

Shortcomings, from my perspective: Lehrman criticizes the gold exchange standard and proposes to eliminate it by international agreement, but I don't see it happening under central banking. The gold exchange standard in the form that Lehrman (and I) think is fragile arose because some central banks wanted to earn greater returns on their assets by substituting foreign interest-earning assets for gold. They accepted greater returns in exchange for greater risk to their assets. The same tradeoff would exist in a restored international gold standard.

Second, you know my view that a durable gold standard is not compatible with modern central banking. Modern central banks exist to practice discretion in monetary policy. Some have inflation targets as guidelines, but not as strict rules that they must always adhere to.  A strict gold standard of the kind Lehrman advocates conflicts with the spirit and practice of modern central banking. Under the classical gold standard, half the world did not have central banking, and in the half that did, the central banks were often privately owned, giving them greater autonomy from the state than later, government-owned central banks have typically had. I think that only a free banking system or possibly a currency board system will produce a durable gold standard under today's conditions of political economy.

Lehrman's proposal is specific to the United States. If a much smaller economy were to adopt a gold standard alone, it would not be sufficient to convert gold from its present role of predominantly a speculative commodity to the more mundane role of a unit of account with much smaller variations in purchasing power. But where might the tipping point be in terms of GDP of gold standard countries as a share of global GDP (if that is a good measure to use)? I would like to see Lehrman or somebody in his circle address the issue, even if the answer is necessarily imprecise.

So, as I wrote in an earlier post, let's have the debate on gold. We know that gold has flaws. After the global financial turmoil and then outright crisis of 2007-09, though, it is astounding to me that many of the people who are highly critical of a gold standard act as if the crisis had nothing to do with monetary policy and that the case for fiat money is as strong as it looked in the placid half-decade before the crisis.

  • Benjamin Cole

    Okay, gold, but why gold? Why not silver? What makes a particular metal useful as a standard? How about electrum? Platinum?

    I hate to say it, but there is something not rational about singling out a particular element, Au, and using it as a monetary standard. Yes, it has value in industry,and more value in jewlery and perhaps some art. But that value is highly subjective. Gold goes in and out of fashion. One reason gold has value now is due to traditional gift-giving in India and China, which both have huge populations with growing disposable incomes. So the value of gold may rise in the future as those natons become even richer, or it may fall if those nations modernize to other types of gift giving.

    Really, I think using gold as a monetary standard could be destabilizing.

    • VangelV

      "I hate to say it, but there is something not rational about singling out a particular element, Au, and using it as a monetary standard…"

      But gold was not singled out and chosen by any particular person or government. The classical gold standard was imposed by choices made in the marketplace.

      "Really, I think using gold as a monetary standard could be destabilizing."

      History shows much greater stability than a fiat standard.

      • MichaelM

        Nope, the classical gold standard certainly was implemented by policy decision in most countries and may or may not have even been DESIGNED as a conscious policy decision. Read up on Isaac Newton's role at the Royal Mint sometime. When we're talking about coin economies in pre-industrial times we're pretty much talking about state dominated monetary supplies which only approach freeish market conditions in long-distance international trade, sometimes.

        The truth is that, before the implementation of the gold standard, gold, silver, and even copper and other metallic currencies circulated next to each other in relatively advanced economies around the world.

        • Paul Marks

          Yes – even in early 19th century Hannover gold and silver coins were minted and used without any "fixed" (read RIGGED) exchange rate between them. If someone wanted to be paid in gold the contract said to be paid in gold – if someone wanted to be paid in silver that is what the contract said.

          • VangelV

            I think that you are confused when you claim that a 'fixed' exchange rate is somehow RIGGED. The only thing that is 'fixed' is the purity and monetary commodity content of the coin. This means that a coin that weighed one ounce would be worth around two half ounce coins. That is it and there is nothing RIGGED about defining the weight precisely.

        • VangelV

          Policy decisions FOLLOWED the markets. As I said, the only thing that governments did when implementing their 'standards' were to define the weight of their coins as a particular weight of the monetary commodity.

          For the record, I agree that the state muscled in on private issuers but again that was in response to the market success that the private coinage was enjoying. And note that the users do not particularly care who provides them the coins as long as the quality and consistency levels are high.

          • MichaelM

            No. This is factually incorrect. In the early 18th century the legally defined relationship between gold and silver coinages in Great Britain drove silver coinage out of usage, possible as a deliberate policy decision at the Royal Mint.

            You cannot sustain this argument. It is wrong. You are saying things that are simply not true. The relationship at the Royal Mint between gold and silver coins was defined by policy, not by the market. Just asserting the opposite doesn't change history.

      • Benjamin Cole

        The long history of China was that of being on a silver standard, by government edict. Of course, silver lost value in relation to gold over the centuries, proving either that gold, or silver, is not a stable commodity, and certainly not in relation to each other. Seems to me the government always determines whether it is a gold, silver, or fiat standard. Without the gravitas and authority of government, no standrad is univeral.

        I suppose one could say gold has value as it can be 1) sold for jewelry, or 2) used to pay taxes, whereas fiat money only has value as 1) it can be used to pay taxes. Does this matter?

        Since the United States went off the gold standard, the globe has had the greatest creation of wealth and income in all history. Could have it been better? I guess, but one can always say that.

        I find the ability to stimulate growth through nmonetary expansionism, and even pay off national debts through monetization to be captivating topics. Here's an odd one: Let us say we are on a gold standard, and then the federal government discovers a large gold mine on public land in Nevada, and pays off the national debt in gold. Everybody cool with that?

        Okay minus the miners digging in the dirt, how is that different from printing up money?

        • Paul Marks

          Mr Cole – China only went into hyper inflation when the last links between silver and the currency were broken (following American advice).

          Why is people digging for gold (or silver) better than people printing money? Because it is a lot harder to dig for gold – the BAD thing about printing money is that it is so easy.

          The last links between a currency and gold were with the Swiss Franc – under the new Constitution the last links with gold were (quietly) broken.

          "Links to" are not as good as "this commodity is the money" – but they are better than nothing (totally fiat money – which is what everywhere has now).

  • Paul Marks

    I think that using a commodity as money is sensible – as for which commodity (or commodities) should be used, that is up to buyers and sellers (voluntary trade).

    But this "standard" idea just confuses the issue – either the commodity (in this case gold) is the money or it is not, to talk of it being a "standard" for something else that is the money just leads to a mess.

    Although not as big a mess as the present situation – where money is just government fiat scrip "backed" by men with guns.

    Fiat (government whim-edict) money is indefensible – in both economic and moral terms.

    By the way….

    Presently both the silver and the gold market are rigged (utterly rigged) although many predict that this rigging will break down soon.

    • VangelV

      All we mean by 'standard' is a specified weight of the monetary commodity. If a coin is defined as so many grains of gold or silver we do not have to keep measuring tokens and verifying their purity at each transaction. In practical terms the 'standard' simply reduces the friction costs.

      • Paul Marks

        Vange1V – historically a "standard" meant that people produced paper saying they would pay X amount of gold, when they did not actually have that amount of gold. This was not just true in the late 1920s (the Benjamin Strong bubble), but even before the First World War. Even careful men such as J.P. Morgan were always on a tightrope – waiting for the next bust-crises.

        • VangelV

          Being on a gold standard meant that each national currency was just a name for a certain weight of gold. That meant that users would not have to worry about 'exchange rates' because they were fixed ratios that were based on the defined weights for each currency.

  • Paul Marks

    A "fixed" exchange rate where you have to (for example) sell a certain amount of gold for a certain amount of silver or go to prison, is BY DEFINITION rigged.

    A free market is where prices (such as exchange rates of gold and silver) are determined by voluntary interaction (supply and demand) not by government edicts enforced by men with guns.

    This is a rather important point – as (for example) "Gresham's Law" ("bad money drives out good") only operates when exchange rates are rigged (i.e. – "if you sell at this price, rather than the price we tell you to sell at, then we put you in prison and shoot you if you resist being put in prison").

    That prices (such as wages or exchange rates of different metals) should be set by voluntary interaction is rather basic to understanding what a free market is.

    • VangelV

      All 'fixed' means in context is that the EXACT weight was defined. If your currency is one oz of silver by definition and mine is two everyone knows the exchange rate.

      • Paul Marks

        VangeIV you are simply mistaken.

        A "fixed" exchange rate between gold or silver (or between two fiat currencies) means that people were told they must (or be punished) accept a certain amount of one form of money (for example silver) in return for another form of money (for example gold). As the "fixed" exchange rate was not the MARKET exchange rate (a free market price is established by supply and demand NOT by government edicts) one or other form of money would tend to be driven off the market over time.

        Fixed (rigged) exchange rates are at the heart of Gresham's Law – as people are not allowed to discount debased coins against full weight coins.

        As for a "Gold STANDARD".

        You believe that all this means is that (for example) a Pound was defined as X amount of metal of a certain purity – but that is NOT all it meant.

        Right from 1694 (when it was founded) the Bank of England did NOT have the full amount of gold or silver to cover all its notes – that is where the word "standard" comes in.

        What you imply (that the word "standard" just means that the currency unit is a certain defined weight of gold or silver of a certain purity) is sadly historically wrong.

        By the standards of today the dishonesty involved in the gold "standard" was minor (someone like J,P, Morgan would tend to have about one ounce of gold for every three ounces he implied he had – believe me by the standards of today that is minor cheating), but it was cheating – that is what the word "standard" was for.

        Otherwise they would simply have said "gold is money – period" and there would have been no lending other than from REAL SAVINGS (genuine sacrifice of consumption) and no boom-busts.

      • Paul Marks

        Take the example of the Pound in relation to the Dollar after World War II.

        There was a "Dollar shortage" – why would that be?

        It was because the EXCHANGE RATE of the Pound in relation to the Dollar was "fixed" – people were not ALLOWED (by law) to use a proper market price (determined by supply and demand), so they could not buy Dollars for Pounds (because they PRICE they were allowed to offer, the "exchange rate", was too low).

        People who call for "fixed exchange rates" (i.e. for the price of one currency in terms of another currency to be set by a government edict – not supply and demand) simply do not understand how free market prices work.

        Then they sit baffled saying "why is there is a Dollar shortage" or "why is there a Black Market".

        Print more Pounds than Dollars and the price of Dollars (in terms of Pounds) will tend eventually to rise – an effort to stop that (by a government edict "fixing" the exchange rate – a form of price control) will drive Dollars off the market thus creating a "Dollar shortage" and a "Black Market".

  • Paul Marks

    No "being on the gold standard" did not mean that money was a certain weight of gold (or any commodity) of a certain purity.

    Indeed even during the "Classical Gold Standard" before the First World War governments (nor banks) did not actually have all the gold their notes suggested they did.

    As I said – the word "standard" just confuses the issue. If gold is the money – then fine. Just say "gold is the money" do not confuse matters by talking about a "standard". Ditto silver or any other commodity.

    Either the commodity is the money or it is not – talk of "standards" is a open door to DECEPTION (even if it is not legally "fraud").

  • Paul Marks

    The private coin manufacturers were indeed hit by the American government (agreed) – the manufacture of private gold and silver coins was hit in the 1850s.

    Governments should not produce coins (there is no good reason for them to do so) – but if they do produce coins, people should always retain the right to say "we prefer to use privately produced coins" as there is less chance of such coins being debased.

    Of course if people are forced to accept government coins (by legal tender laws and tax demands) then this is undermined – as it is by rigged exchange rates (demanding, for example, that people must accept a low purity government coin for a high purity private coin).

  • NensyDonovan

    After the First World War the international community has made another attempt to return to the lost stability. Laws gold monometallism suggested a phased return to the gold standard. Initially, central banks, utilizing foreign exchange intervention, should stabilize the exchange rate of the national currency.