Is a Gold Standard the Answer to Our Monetary Crack-Up?

My brother Tom shared an article from the Cato Institute entitled: “Why Gold-Defined Money Is the Answer to Our Monetary Crack-Up”.

I agree with the writer in theory but as Yogi Berra said: In theory, there is no difference between theory and practice. In practice, there is. A couple points:

With a fixed currency like a gold standard innovation and value creation that grows the economy will be constrained and what growth does occur will cause prices to fall, hurting the producers of goods and limiting real returns to their investors. There has to be some mechanism to grow money supply at the approximate rate of real growth in the economy.

The real problems we’re facing around the world are from excess leverage and at the end of every debt binge the unwinding happens in three ways.  Debt creation can be reduced and austerity can be imposed to make room for debt repayment; Ask the Irish and the Greeks how that’s working out. Debt can be defaulted on; See Iceland and all the homeowners walking away from their underwater homes. The third way is to print your way out and while that causes inflation and devalues the currency (not necessarily a bad thing) it avoids the death spiral of deflation that austerity causes and allows continued access to credit markets that would be unavailable after a default. I highly recommend Reinhart and Rogoff’s  “This Time Is Different: Eight Centuries of Financial Folly” to see how hundreds of these episodes have played out over and over again during the last eight hundred years. Check out my other fav reads in the Amazon boxes to the right ->

Speaking of Greece and the Euro countries as a whole, the thing that threatens to blow their whole deal up is that all the countries do have a fixed currency and the profligate southern countries can’t devalue their currency by printing their way out of the mess they’ve made for themselves. For a fixed currency and/or exchange rate to work there must be borderless, frictionless trade and a single centralized fiscal authority. If anyone thinks being the world’s policeman is tough, try to imagine being the world’s parent (or even just Europe’s), setting everyone’s allowance.

Fixed currencies work in theory but in practice having a little flexibility on the monetary side, especially when combined with a rational fiscal policy, creates better opportunities for spreading prosperity, promoting innovation and value creation.

What do you think?


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