By: John Tamny
Real Clear Markets
January 7, 2014
The increasingly fraudulent economics profession, along with the media commentariat which enables it, is almost to a man and women viscerally opposed to a return to the gold standard. Outgoing Fed Chairman Ben Bernanke has long been very public about his opposition to stable money, and it would be naïve to presume that Janet Yellen is any different.
What’s interesting about the opponents of stable money is that their arguments against the gold standard are most successful for explaining why we need one. In March of 2012 Bernanke gave a lecture in which he expressed his opposition, but in decrying a monetary system that would rob the Fed of discretionary powers, not to mention give the dollar the very definition that makes the foot and minute so useful, the hapless Fed Chairman unwittingly explained why a return to money defined by the constant that is gold would represent rocket fuel for the global economy.
All of which brings us to Michael Hiltzik, a senior economics writer for the Los Angeles Times. In an article meant to discredit the rising popularity of Bitcoins, Hiltzik suggested that their popularity is a function of “people convinced that money under the control of governments and their central banks has been systematically devalued for political advantage.” He went on to write that these same people that the “world monetary system has gone to hell since the gold standard went out,” and “To them, bitcoins are the closest thing to gold that today’s technology can offer.”
About Bitcoins, it’s my own view that they’re a junk currency. While they’re the inevitable, and in a sense healthy, result of government mismanagement of money, they’re junk. What’s perhaps interesting is that they’re in my mind junk precisely for the reason that Hiltzik states. As he put it, “Over the last month, they’ve been quoted as high as $1,200 and as low as $455.”
Adam Smith wrote in The Wealth of Nations that “the sole use of money is to circulate consumable goods.” Money was conceived as a measure much like the foot and minute, so to ensure voluminous trade, it’s necessary that it be stable in value so that both sides of a transaction can credibly measure what they’re exchanging. Per Smith’s tautology, money that is unstable in value is bad money precisely because unstable money turns the wealth enhancing and balancing concept of trade on its very head.
Think of it this way: imagine if I offer a contractor 10 bitcoins to remodel my kitchen, and the payment will occur upon completion of the work. Let’s assume also that my offer is based on a bitcoin trading at $1,000. All is seemingly well, but what if the value of the bitcoin floats down to $500 upon completion. If so, the contractor loses in a major way on the job he was hired to do. Conversely, if the value of a bitcoin soars to $1,500 upon completion, I’m the loser in the transaction.
What this explicitly tells us is that unstable, floating money is a deterrent to the very economic activity that money is issued for to begin with. When money floats, the act of trade which is the purpose of all economic activity is made rather hazardous.
To quote Hiltzik with the volatility of bitcoins very much in mind, “Any retailer holding bitcoins for any length of time, therefore, is asking to be slaughtered.” Hiltzik is absolutely right, but in making this essential point about money, he has unwittingly made one of the best arguments yet for a return to the gold standard.
At present, and this has been true since 1971 when President Nixon naively severed the dollar’s link to gold, the dollar floats in value. Gold was historically the definer of money not because it was pretty, but precisely because it was and is the most stable commodity known to mankind. More to the point, when we see the price of gold fluctuating we’re not witnessing changes in the value of the yellow metal; rather we’re seeing changes in the value of the floating unit of account (the dollar) in terms of gold. When gold rises that signals a decline in the value of the dollar, and when it falls the decline signals a rise in the value of the dollar.
In that case, since 1971 we’ve seen the very dollar volatility that Hiltzik properly fingers as the problem with bitcoins. A dollar bought 1/35th of an ounce of the constant that is gold in 1971, yet by 1981 it purchased 1/480th. In 2011, a dollar bought 1/1900th of an ounce of gold, but as of this writing it buys 1/1200th of an ounce. Is it any wonder that global trade disputes have become more frequent since 1971?
The volatility in the price of bitcoins that troubles Hiltzik is exactly what troubles gold standard advocates about a dollar that has lacked a gold definition for over 40 years. Bitcoin’s problem is that its very concept is rooted in coin scarcity, thus the volatility that renders it rather useless as a currency.
Assuming a return to the gold standard, no such scarcity would exist. That’s case because a return to gold would involve Treasury pegging the dollar’s value to a gold ounce. If so, and if the peg were for instance $800/gold ounce, the supply of dollars would be constantly adjusted to maintain the integrity of the peg itself. If the price of gold rises to $801, the latter would signal over-issuance of the dollar. If the price of gold were to fall to $799, the latter would signal under-issuance of the greenback such that Treasury or the Fed would buy bonds in the marketplace in order to add market-demanded dollars to the system.
Rather than leaving our monetary policy and the supply of money to the alleged “wise men” inside central banks, monetary policy would be set by the market itself, and supply of dollars transmitted through the price of gold. A stable dollar in terms of value would provide the greenback with the very non-volatility that Hiltzik correctly fingers as the problem with bitcoins. Notable here is that a return to stable money would signal the death of the bitcoin and other stores of value used as hedges against dollar mismanagement.
Michael Hiltzik’s heart is in the right place with his dismissal of bitcoins as credible money. Where he misses is in his dismissal of gold-defined money. Indeed, as his article makes plain, he’s perhaps unintentionally made the best case for a gold standard in a very long time.