LSC 2019 presentation - The Populist Case for the Gold Standard

1. The Populist Case for the
Gold Standard
Libertarian Scholars’ Conference 2019

2. Overview
 The problems caused by fiat money
 How a gold standard would solve these problems
 A program for returning to gold
 Why it must be a populist case

3. Definitions
 Gold standard: A monetary system where gold is
money and money production is guided by market
demand and the law of costs
 Fiat money standard: Government paper is money
and money production is a question of monetary
policy

4. The problems of fiat money I:
Inflation
 Cantillon effects: new money enters the economy
gradually in a step-by-step manner, all prices and
incomes are not all raised all at once
 Price inflation: the continual inflow of money leads
to a steady increase of all consumer prices eroding
the purchasing power of the dollar

5. Inflation, continued

6. Inflation, continued

7. Inflation, continued
 Inflation puts a premium on present consumption,
discourages cash hoarding
 It is advantageous to the first receivers of new
money, but the great mass of people at best breaks
even
 Inflation disrupts economic calculation as prices are
disrupted by monetary policy

8. Inflation, continued

9. Inflation, continued
 The non-price effects of monetary inflation (Sieron
2017)
 If monetary inflation affects prices of producer
goods before consumer goods, the result may be
quality reductions
 (This is especially the case with the case of credit
expansion)

10. Inflation, continued
 One example is the decline of beef consumption
and the explosion of chicken consumption instead
 Beef consumption has declined 30 per cent since
1971
 Chicken consumption has more than doubled since
1971

11. The problems of fiat money II:
redistribution
 Cantillon effects redistribute income and wealth to
early receivers of new money away from later
receivers
 Under present monetary regime, inflation benefits
banks, financial sector and government

12. Redistribution, continued
 The groups that benefit from inflation:
 Government and government-connected firms
 Financial firms and operators
 Asset owners
 Corporations with good access to financial markets

13. Redistribution, continued
 Groups that are hurt by inflation:
 Workers with little access to financial markets
 People on fixed incomes

14. Redistribution, continued
 Some economists argue a gap has developed
between increasing productivity and stagnating
wages
 Until the 1970s, increasing productivity and total
compensation to workers kept pace
 Since then, a large gap has developed

15. Redistribution, continued

16. Redistribution, continued
 It is doubtful that the reality is as stark as these
studies claim
 The long-term trend is always toward wages being
set according to marginal value productivity
 However, in the short term, inflation entails a
redistribution that distorts this process

17. The problems of fiat money III:
Financial dependence
 Fiat money loses purchasing power over time,
discouraging plain saving
 Furthermore, monetary policy leads to an increase
in the price of financial assets relative to non-
financial assets (Zukauskas and Hülsmann 2018)

18. Financial dependence, continued
 The result is that saving in the form of cash
hoarding and direct investment in equities is
discouraged
 In order to protect themselves from the wealth-
destroying effects of inflation, savers have to take
on debt to invest in financial assets

19. Financial dependence, continued
 The result is a situation where everybody is
dependent on financial services for their needs as
consumers as savers
 And financial markets increasingly look to central
bank interventions (and regulations) in their
operations

20. Financial dependence, continued
 The business cycle also leads to greater
dependence on financial markets
 Credit expansion leads firms to take on more debt
during the boom, leaves them with a large debt
burden in the recession
 While banks are almost always protected from
failure in the bust

21. The Problems of fiat money IV:
De-industrialization
 The integration of ex-communist countries into the
world economy inevitably lead to dislocations,
decline of some industries
 However, monetary policy has also contributed to
this tendency

22. De-industrialization, continued
 Dollar inflation should under normal circumstances
lead to the devaluation of the dollar against foreign
currencies
 However, the piling up of dollar balances in e.g.
China negates this effect
 Import-competing and exporting industries are
therefore worse off than they would have been

23. Gold as the solution
 Fundamentally, a gold standard will take politics out
of money production
 The production of money will be subject to the
same constraints as all other production on the
market
 There will be no Cantillon effects and hence no
problems of redistribution

24. Gold as the solution
 "The reason for using a commodity money is
precisely to prevent political influence from affecting
directly the value of the monetary unit. Gold is not
the standard money solely on account of its
brilliance or its physical and chemical
characteristics.

25. Gold as the solution
 Gold is the standard money primarily because an
increase or decrease in the available quantity is
independent of the orders issued by political
authorities. The distinctive feature of the gold
standard is that it makes changes in the quantity of
money dependent on the profitability of gold
production."
 - Ludwig von Mises

26. Solving inflation
 There will still be money production and additions to
the money supply on the gold standard
 But gold will only be produced in response to
market demand, and it will be constrained by the
law of costs
 E.g. a growing population will mean larger demand
for gold → more gold produced

27. Solving redistribution
 Producing gold will generate profits for gold miners
 But these profits are not fundamentally different
from those in other ventures
 The only “redistribution” is to successful
entrepreneurs and productive workers, asset
owners, which happens in all sectors of the market
economy

28. Solving financial dependence
 By removing the inflow of new money into financial
markets, the artificial stimulus to engage in financial
transactions are removed
 Removing the ability to print money at will (credit
expansion) removes the cause of business cycles

29. Solving de-industrialization
 The gold standard will remove the possibility of a
permanent balance of payments deficit
 Insofar as this deficit handicapped exports and
gave an advantage to foreign firms on the American
market, this handicap and advantage will be gone
 But uncompetitive US firms and industries will still
go under

30. The return to gold
 Mises’s 1953 reform our guide. Three essential
elements:
 1. Stop all inflationary activity
 2. Let the market set the new parity between gold
and dollars
 3. ensure that physical gold and not only claims to
gold enters circulation

31. The return to gold: step 1
 Cease all inflation, stop all credit expansion
 Repeal legal tender laws
 Announce the intention to return to gold in the near
future
 This will allow markets to price in the return of
monetary uses of gold

32. The return to gold: step 2
 Once the price of gold has settled, this price will be
declared the new legal parity
 Note that we need not expect a huge increase in
the gold price: gold is already used for (quasi-
)monetary purposes, and a reform will itself shore
up the value of the dollar
 Once the parity is set, dollars presented to gov’t
conversion agency will be redeemed in gold

33. Is there gold enough?
 The Treasury has about 8,140 metric tons – at price
of $1,500 per ounce, worth about $400 billion
 M1 is about $3.9 trillion, M2 about $15 trillion
 However, not all dollars and dollar substitutes need
be presented for redemption at once

34. What about fiduciary media?
 Fiduciary media (checkable deposits) a minor part
of money supply right now
 Current fiduciary media in existence can be “frozen”
and allowed to continue
 Some media may be classified as IOUs: callable
loans not secured by reserves. These would not be
included in redemption, they would trade at a
discount against money (Hülsmann 2003)

35. What about fiduciary media?

36. What about fiduciary media?
 Any classification of fiduciary media as legally only
IOUs, not deposits, must be done in accordance
with contracts; it cannot be a redefinition of
contracts
 While such an action would reduce the amount to
be redeemed, it also risks triggering an economic
crisis

37. The return to gold: step 3
 What about small change?
 One solution is to let banks deal with the problem
 Another is to allow redemption in silver (NOT
bimetallism)
 This would be consonant with our gold of complete
monetary freedom

38. Why a populist case?
 "The first condition of any real monetary reform is
still to rout completely all populist doctrines...”
 - Ludwig von Mises
 “The slogan, "Down with gold," must be ousted. The
solution rests on substituting in its place: "No
governmental interference with the value of the
monetary unit!"”

39. Why a populist case?
 1. It is not in the self-interest of politicians and
bureaucrats to return to sound money; but it is
clearly in the interest of the general public
 2. All social institutions rest ultimately on popular
support for their continued existence – hence, the
public at large must be convinced of the justice and
utility of sound money

40. Why a populist case?
 By populism and populist, we simply mean an
appeal to “normal” people – not “elites” and policy-
makers
 It must still be an honest presentation of the
benefits from sound money – and the injustices and
disadvantages of easy money

41. Why a populist case?
 “We must show how the money system
impoverishes most people and benefits politicians,
government officials, and entitlement cronies”
 - Hans Sennholz

42. Why a populist case?
 The gold standard is an integral part of a classical
liberal program – this is a fact that must not be
hidden
 This doesn’t mean that potential supporters of gold
must be won over to libertarianism in toto
 The moral case for gold and the economic benefits
of the gold standard stand on their own feet

43. Why a populist case?
 However, it means that antiliberal policies and
politicians must be shunned; the goal is to win
support for sound principles, compromise is only
harmful in the long run
 Populists who advance unsound economic policies
must be shunned, theirs is a clown world populism

44. Conclusion
 A gold standard is both practicable and the best
solution to the current monetary ills
 The most feasible way to bring it about is to make it
a popular crusade – which is also the most
Misesian way to do it