Binyamin Appelbaum's Well-Intended Gold Misfire

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"The greatest contribution that America can make to international cooperation is to...stabilize the dollar in terms of a fixed quantity of gold." Who said this, or who wrote it? Sen. Rand Paul, Sen. Ted Cruz, maybe Steve Forbes?

In fact the above quote came from a New York Times editorial in July of 1944. The Times, like the Washington Post back then, was strongly in favor of the Bretton Woods monetary agreement that defined the dollar as 1/35th of an ounce of gold, and that subsequently placed participating country currencies on a dollar standard.

The Times quote carries extra relevance today in light of the newspaper's modern skepticism about the gold standard. In a recent article, Federal Reserve reporter Binyamin Appelbaum explained to readers that the "Good Old Days of Gold Really Weren't."

In Appelbaum's defense, the gold standard, or better yet the gold exchange standard, is not really something that he claims to understand very well. And in a well-meaning piece on gold-defined money, Appelbaum unwittingly promoted a lot of falsehoods about monetary stability held by the left, all the while allowing to stand similar falsehoods believed by the right. Additionally, his analysis about the presumed economic consensus regarding gold left out some valuable historical truths.

Appelbaum's first argument against stabilizing the dollar in gold terms referenced a 2012 University of Chicago poll of "40 leading economists." All 40 "said no" about returning to gold, according to Appelbaum. That's interesting at first glance, but by that standard the top tax rate of 70 percent that prevailed in the 1970s should never have been reduced. Back in the ‘70s economists, almost to a man and woman, felt tax cuts would be the source of an inflationary breakout. As Alan Greenspan said about Arthur Laffer, Laffer then an outcast in the economics profession for supporting reduced taxation, "I don't know anyone who seriously believes his argument." What Appelbaum deems consensus has a tendency to change. While not all economists agree on the proper level of taxation, it's a fair bet that if the profession were polled today about the supposed good of raising the top tax rate to 70 percent, most would now say no.

All this requires mention when we consider the consensus inside the economics profession back in 1944. It was then that Henry Morgenthau and Harry Dexter White from the U.S. Treasury teamed up with John Maynard Keynes at the Mount Washington Resort in Bretton Woods, NH. The monetary agreement they crafted was strongly supported by economists. Indeed, as Eric Rauchway reports in his new book The Money Makers, "A poll of the entire membership of the American Economic Association, including some 1,800 economists, showed 90 percent in favor of the system." What is consensus once again has a tendency to change, and if economists can be so confident that tax cuts cause inflation as they were in the 1970s (many established ones also felt the Soviet Union's command economy was working...), can't it also be true that their present consensus might prove wanting in time? The possibility should at least be entertained.

Appelbaum wrote that "The gold standard was invented to constrain government spending." But that's not true. The gold standard was invented given the historical consensus among economic thinkers (John Stuart Mill, David Ricardo, Adam Smith, and yes, Keynes) that the "sole use of money is to circulate consumable goods" (Smith). Their point was that money is not wealth; rather it's a measure or instrument meant to facilitate the exchange of wealth, along with investment in the creation of future wealth. As Keynes himself explained it in his Tract on Monetary Reform, "Capitalism of to-day presumes a stable measuring rod of value, and cannot be efficient - perhaps cannot survive - without one."

Government spending? It's popular on the right today to say that gold restrains government spending, but as simple logic dictates, it does no such thing. Figure investors who buy government debt are buying future income streams of a currency. Since they are, stable currency streams in the future are logically much more attractive than are currency payouts that bring with them the potential for currency devaluation. Notable here is that as British historian Niall Ferguson pointed out in books including The Cash Nexus and Empire, Great Britain's ability to finance its wars and the growth of its empire soared after the "Glorious Revolution" that led to the "import" of the Dutch gold standard. Considering World War II, and allowing for the truth that GDP is a fraudulent measure of economic health on its best day, the U.S. ran up the largest deficits in its history (in terms of GDP) with the dollar defined as 1/35th of a gold ounce.

Beyond that, governments can only spend or borrow insofar as the citizens they're taxing are economically productive in the first place. Applied to the U.S. today, Treasury can issue lots of debt precisely because the U.S. economy has been historically robust. Haiti's government cannot issue lots of debt simply because there's very little growth to speak of on the island nation. More on economic growth in a bit, and the role of gold-defined money in it, but it's pure folly to presume as the right do (or as Appelbaum mis-reports) that gold restrains government spending. Quite the opposite.

Appelbaum dislikes the idea of gold-defined money given his view that "during recessions, printing money can help revive economic activity." But does he really believe this? On its face it's a questionable presumption. If mere creation of money were the source of economic dynamism, perpetually-recessed El Salvador could simply attempt to boost money supply to an equivalent U.S. level.

But to show why this wouldn't work, a Baltimore/Silicon Valley thought experiment is in order. Baltimore is a monument to weak economic growth. In that case, let's assume the Fed deposits billions of dollars into Baltimore banks. If so, the economic impact would be too tiny to calculate. That's because Baltimore banks, eager to be paid back, would almost instantaneously lend the money to vibrant economic concepts well outside of always downtrodden Baltimore. Assuming a cash-drop of billions onto the streets of Baltimore, the result would be much the same. Even if every dollar were spent in the city, it would ultimately be spent on and flow to businesses well outside the Charm City.

Conversely, imagine if the Fed were to drain billions from the banks that populate presently booming Silicon Valley. If so, investment meant to replace what was drained would almost immediately arrive in order to attach itself to all the innovation taking place there. There's quite simply never a problem of too little "money supply" in places where abundant economic activity means it's being treated well. Appelbaum cited "conservative economic icon" Milton Friedman to make the so-called "money supply" case, but the reality is that money supply is an effect of economic growth, not the driver of same. As Friedman himself perhaps sheepishly admitted to the Financial Times in 2003, "The use of quantity of money as a target has not been a success. I am not sure that I would as of today push it as hard as I once did."

It's possible that what Appelbaum really meant by "printing money" is that devaluation of the currency is the driver of renewed economic vitality. This is unlikely. It's surely not lost on him that investment is the source of company and job creation. In that case, and going back to the earlier discussion of deficit finance by governments, investors in each instance are buying future currency income streams. Since they are, it would be hard for Appelbaum to argue that devaluing the dollar (or any currency for that matter) would serve as a lure to investors explicitly buying dollars in the future.

And then it's possible Appelbaum meant that a gold exchange standard is the same as "tight" money.  This is a view promoted by both the left and right, and it's a false one.  Under a gold exchange standard, money is neither tight nor loose.  Supply of it rises and falls in order to maintain the value integrity of the currency/gold peg.  

That said, gold-defined money almost as a rule signals nominally abundant supply simply because producers and investors always and everywhere migrate to currencies most known for their stability in terms of value.  If this is doubted readers need only imagine owning a valuable company, only to put it up for sale.  Would readers ever accept Mexican pesos or the Haitian Gourde over U.S. dollars and Swiss francs? Probably not.  A gold-defined dollar would be quite a bit more attractive than the presently floating one, and this would reveal itself through soaring dollar supply.  

Appelbaum cited another popular view on the right that the Fed itself is the source of devaluation. Here he quoted Sen. Rand Paul who, in a recent debate said that the Fed "destroys the value of the currency." Sen. Paul's anti-devaluation heart was in the right place, but the historical truth is that the Fed does not handle the dollar's exchange value. The latter is a Treasury/presidential function. Appelbaum oddly left this out, but history is very clear here.

Going back to 1933, the devaluation of the dollar from 1/20th of a gold ounce to 1/35th was not a Fed decision. In fact, Franklin Delano Roosevelt made the decision to weaken the greenback. Then Fed Chairman Eugene Meyer actually resigned over FDR's devaluation. As for the Bretton Woods conference, Treasury Secretary Morgenthau presided over it. Fast forward to 1971, it was President Nixon and Treasury Secretary Connally's decision to delink the dollar from gold then. Fed Chairman Arthur Burns was passionately against Nixon's action. Presidents always get the dollar they want, period. The right's focus on the Fed as the source of devaluation is misplaced.

Appelbaum argued that "There is nothing inherently stable about the value of gold." He added that gold "fluctuates, like the value of everything else, as more is extracted from the ground and as demand waxes and wanes." On the latter readers might excuse Appelbaum for simply not knowing his subject very well. He's not alone.

For Appelbaum to suggest that new gold discoveries affect its price is the equivalent of saying that the sale of 100,000 shares of ExxonMobil stock will move its price. But such a sale wouldn't when we consider total supply of Exxon shares that extends well beyond 6 billion. Gold is similar. While there are over 150,000 metric tons of gold above ground, new annual discoveries constitute a small fraction of the previous number. Gold is stable, and has long been used to define money, precisely because its price has not historically been altered by sales or new discoveries. The stock/flow disparity has been too great. When gold moves it's not the price of the yellow metal fluctuating, rather it's the value of the currencies in which gold is priced changing in value. The gold price reflects currency stability or mismanagement as opposed to gold itself moving in value.

Still, if the above constitutes Appelbaum's skepticism about a gold-defined dollar, then there exists an opportunity for dialogue among all sides. Any serious advocate of gold-defined money will say that they're fully open to alternatives. If a commodity or market good exists that is even more constant in value than gold, then gold advocates will gladly switch their preference to the new standard. The ultimate goal is stable currency values; gold as the definer unnecessary if there's something better out there.

Appelbaum observed that periods of gold-defined money in no way correlated with stable prices. If so, that's a feature, not a bug, of gold-defined money. Figure dynamic economies are always and everywhere defined by falling prices. That is so simply because high prices attract new competition, not to mention that they're a lure for investment meant to find new ways to produce market goods in more productive ways.

Looked at modernly, the first mainframe computer manufactured by IBM cost over $1 million, the first mobile phone manufactured by Motorola cost $3,995, and early flat-screen televisions retailed in the $20,000 range. Investment is the source of falling prices, so for Appelbaum to besmirch good money's inability to keep retail prices stable, of for that matter for any gold advocate to suggest that good money correlates with stable prices, is for both sides to reveal an impressive misunderstanding of how dynamic economies work.

All of which leads us to Appelbaum's biggest problem with gold-defined money: economic volatility. There he cited economist Michael Bordo's calculation that "economic volatility was significantly greater during the gold standard years." Leaving aside the arrogant conceit of economists to measure the infinite decisions that take place in an economy every millisecond, greater volatility in an economy is once again a feature of stable money, not a bug.

Indeed, does any serious economic thinker presume that the early 20th century American economy in which the automobile was mass-produced occurred in concert with stability? In truth, nearly every carmaker that was incorporated back then failed. Considering the advent of the personal computer in the late ‘70s and early ‘80s, just about every producer of what is now an essential market good similarly no longer exists. Moving to the 1990s and the rise of the internet, the 2001 correction in Silicon Valley once again left countless failures in its wake. We know about the publicly traded companies that imploded, but has anyone stopped to contemplate the countless other internet concepts that never rated a public offering of shares at all?

Investors, when they commit capital, are once again buying currency income streams in the future. That's of course why money that is stable correlates very happily with a volatile economic outlook. Volatility is itself a growth spasm as investment gifts economic actors with all manner of new information. Conversely, floating money values are an investment deterrent such that fewer companies see the light of day alongside reduced information about what a market economy desires. Missed by Appelbaum and Bordo is that economic volatility is a compliment that signals major commercial advances. Both unwittingly provided readers with yet another reason to clamor for good money. Don't we all want to see the next generation of flight, auto travel, computers, not to mention the inevitable advance that renders the internet dated?

In Appelbaum's defense once again, he meant well with his analysis of the gold standard, and his reporting was hardly bitter. The obvious problem with it was that like most reporters on the subject of stable money, he was writing blind. Despite his evident unfamiliarity with the subject, his article included no interviews with anyone who actually supports gold-defined money. It showed.

Still, it wasn't angry. Maybe from his misfire will spring actual dialogue. Money's sole purpose is exchange. That's the "why" behind "gold" and "stable." Hopefully future pieces by him will acknowledge the importance of currency stability that he at least alluded to. If he's got a better way to define money in order to achieve currency stability, true gold advocates will welcome his thoughts with open arms.

 

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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