HuffPo Writer Becomes Unhinged When Ted Cruz Praises Gold Standard

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HuffPo Writer Becomes Unhinged When Ted Cruz Praises Gold Standard

December 23, 2015

In case you had any illusions about mainstream pundits softening on their hatred of the use of gold a money, witness today's absolutely hysterical diatribe against gold at Huffpo by someone named Zach Carter. 
Carter apparently blew a gasket when he heard that Ted Cruz was out stumping in favor of a gold standard, or at least an approximation of one. 
Carter begins by noting that Cruz may be the only viable alternative to “the racist billionaire” Trump, but the GOP has a big problem even with Cruz since Cruz, in the Carter narrative, is an obvious kook due to his support for a gold standard. (For the record, I do not think that Cruz, if elected, would ever do anything to actually try and bring about a system of more market-oriented money.)
Notes Carter [my comments in bold and brackets]:

In reality, a key plank of his economic platform would horrify [the GOP leaders]: Cruz supports a return to the gold standard, a relic of the pre-Depression past that would wreak havoc on the American business class, and on the rest of society too. [So, Carter tells us that gold is bad for the business class. Below, however, we'll be told that the business class loved gold in the dark ages of the Gilded Age.] 

“I think the Fed should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold,”Cruz said in an October debate. [This is a bit naive on Cruz's part, but correct as far as it goes, I suppose. The Fed has never been in the business of concentrating on “sound money.”] 

He reiterated the call two weeks later. “We had a gold standard under Bretton Woods, we had it for about 170 years of our nation’s history, and enjoyed booming economic growth and lower inflation than we have had with the Fed now,” Cruz said at a Nov. 10 debate. “We need to get back to sound money.” [Cruz is wrong here. the US was not on a gold standard under Bretton Woods. There was an international “gold exchange rate” system in which, say, the French government could exchange its dollar holdings for gold at $35 dollars per ounce. That's very different from a “gold standard” in which privately held dollars are convertible to gold.] 

No country on Earth now relies on a gold standard for its currency. A 2012 survey of economists conducted by the University of Chicago's Initiative on Global Markets found literally no support for the gold standard among any of its respondents. These were not all liberals in love with deficit spending and robust regulation. Seven of the economists came from the notoriously conservative Chicago school itself. [Anyone who knows anything about the Chicago school would not be the least bit surprised by this, since the Chicago school is one of the most vociferous opponents of a gold standard.] 

“A gold standard regime would be a disaster for any large advanced economy,” University of Chicago economist Anil Kashyap told the researchers, adding that support for the idea “implies macroeconomic illiteracy.” [In other words, any pro-gold economist is, by definition, a fool.] 

“There are much better ways to avoid excessive inflation, while maintaining the flexibility of a fiat currency,” said University of Chicago economist Nancy Stokey.[Flexibility for whom, exactly? Flexibility for the state is the most significant side-effect of fiat money.] 

Under a gold standard, a country pegs the value of its currency to a certain amount of gold.  If you own dollars, you can trade them in to the government for a fixed amount of gold. This was appealing to ancient and medieval peoples who fetishized a shiny metal with limited practical use. But it turned out to be a disaster for major developed economies. [Fetishized = irrational. Medieval = backward. “Limited practical use” = gold is inherently worthless. Carter packs a lot of maudlin bias into a single sentence here. and how exactly was gold a disaster for major developed economies? The greatest gains in the standard of living in Western history occurred in Western Europe under a gold standard.]

“In the late 19th century, the Gilded Age robber barons and big bankers thought the gold standard very modern,” University of Texas at Austin economist James Galbraith told The Huffington Post in an email. “I congratulate Senator Cruz; his economics is perfectly in line with his worldview.” [Wait, I thought the gold standard was terrible for the business class. Carter told me so above. So Galbraith is saying that gold is a tool of the business class? So which is it?] 

The price of gold is notoriously volatile. [Carter links here to an article that discusses gold as a commodity for investment, which tells us nothing about the use of gold as money.] That irregularity can be destructive, and can make it very difficult for business leaders to plan their affairs. Say the price of gold drops 10 percent because a new mine is discovered, and speculators fuel a downward spiral in prices. If the dollar is pegged to the price of gold, that means the value of the dollar just dropped 10 percent because someone dug a hole in the ground.[A new mine is discovered and the price drops ten percent? Not likely in a world where gold is used as money. Again, in the modern world, since gold is not used as money, we can only guess about how its price would be affected by a new mine, but in reality, the discovery of a new mine means almost nothing. To get the gold, it must be extracted from the ground in a long and costly process. Maybe Carter imagines that a bunch of bearded miners with pick axes still haphazardly remove gold nuggets from caves using mules and iron carts. That's not how it works. Moreover, the extraction process is itself affected by the price, so if a company started mining gold and the price of gold began to drop, the company would respond by mining less gold and the price would stabilize.]  

“Every country in the world went off the gold standard for a reason,” says economist Dean Baker, co-director of the Center for Economic and Policy Research. “It was inconsistent with normal economic policy.” [Baker implies that everyone just decided that gold was bad some day. The problem, however, was not gold, but the state-sanctioned (or at least state-tolerated) practice of fractional reserve banking. In an unhampered economy, a market would work against fractional reserve banking since banks that relied on fractional-reserves would tend to go out of business. But, in fact, government enabled the fractional reserve systems by indirectly subsidizing and supporting the “clearinghouse” system of quasi central banks that allowed insolvent banks to unilaterally change the contractual terms by which the banks had been lent money by depositors. See Howden for more on this.] 

Yet the gold standard does have its adherents, and Cruz is getting some financial support for his quixotic monetary move. A new political ad group called the Lone Star Committee is trying to raise $1 million for a New Hampshire ad blitz promoting the gold standard. This is not an establishment Republican group. It's being run by Richard Danker, a policy adviser at the obscure conservative think tank American Principles in Action. Danker managed the 2014 Senate campaign of Jeff Bell, his boss at APA, who in turn was routed by Sen. Cory Booker (D-N.J.). APA is chiefly underwritten by the anti-gay financier Sean Fieler. [Fieler doesn't like gay marriage, therefore, the gold standard is bad. Sound logic, that.] 

Former Rep. Ron Paul (R-Texas) has been perhaps the most prominent advocate of the gold standard in recent decades, using his perch in Congress to excoriate the Federal Reserve and demand a return to “hard money.” He now appears in TV ads warning of a looming financial crisis in which “stocks and bonds will crash” and “the savings of millions will be wiped out.” In these ads, Paul encourages viewers to buy a book written by one Porter Stansberry, a man whom, it turns out, the Securities and Exchange Commission once successfully sued for securities fraud. [Stansberry was sued for the crime of saying things. He made claims about a stock price, and ended up being wrong. The SEC later claimed this was “fraud,” even though Stansberry had no financial stake in the stock in question. Thus, even The New York Times believed the SEC suit to be a disaster for freedom of speech, and concluded that the attack on Stansberry was an attack on the first amendment.]

Hardcore anti-government libertarians tend to like the gold standard because it takes economic power away from central bankers and hands it over to financial markets. For many libertarians, a net loss in government power is a net gain in freedom. But Cruz's gold-standard pitch isn't just a play for the general libertarian vote. It's an appeal to a very specific kind of libertarian who believes in particularly weird things. 

Milton Friedman was an extreme libertarian who opposed the licensing of physicians on the grounds that such government meddling was harming the market for doctors. Yet on the subject of the gold standard, not even he was as much of a hawk as Cruz. [Milton Friedman is one of the greatest things that ever happened to opponents of free markets. “Even Milton Friendman was for government intervention X…” is a convenient catch-all that has helped undermine free markets for decades.] 

Friedman's greatest work was a 1963 book he co-wrote with his wife, Anna Schwartz, titled A Monetary History of the United States. In it, Friedman and Schwartz make a persuasive case that the gold standard actually caused the Great Depression. [A claim that has been refuted many times by more astute Austrian economists, such as Rothbard.]In the early years of the Depression, currency speculators and worried citizens extracted huge sums of gold from government coffers by trading in their dollars, concerned that the government would not be able to support the value of the currency. The Fed responded with a single action that protected its gold reserves, the value of the dollar and the integrity of the gold standard: It raised interest rates. Doing so offered citizens a potentially greater return on their holdings of U.S. dollars, since higher interest rates mean better returns on savings accounts. 

It worked. The dollar grew stronger and the run on American currency abated. But by encouraging people to save, the Fed was discouraging people from spending, curtailing the total amount of money available in the general economy. This, Friedman argued, turned an economic problem into a calamity. When everybody is broke, the last thing you want to do is limit the supply of money. Without money, nobody is going to get out of being broke. [What Carter fails to note in this whole summary is that the Depression did not materialize out of nowhere, and it certainly was not the result of the the Fed being too committed to “hard” money. As Rothbard has shown, the Fed was committed to easy money during the 20s, and the bust of the early 30s followed the easy-money- induced boom of the 20s.] 

President Franklin D. Roosevelt solved this dilemma in 1933 by taking the U.S. off the gold standard. [Carter is referring to that time FDR stole gold from private citizens  under threat of draconian fines and prison terms.] That freed up the Fed to adjust the money supply based purely on broader economic conditions, without regard to how many pounds of gold it might secure by doing so. Roosevelt allowed foreign governments to continue to cash in dollars for gold, but that last vestige of the gold standard was abolished by President Richard Nixon in 1971. [and followed by the Nixon Shock, massive inflation, and multiple recessions.] 

Today, gold standard adherents consist mainly of cranks, crackpots and devotees of the Austrian school of economics. [Austrians aren't necessarily gold standard adherents. We're in favor of money that is not manipulated by government. See below.] And the years since the financial crisis have devastated the intellectual underpinnings of the Austrian school. [Yes, if you're a wealthy billionaire the last several years have been great. If you like affordable housing and household income that actually goes up, however, you're out of luck.] Austrian goldbugs began warning in 2009 that hyperinflation was just around the corner, because based on the Austrian money model, it should have been. But hyperinflation never happened. [Some Austrians said that. Others didn't. And certainly hyperinflation is not the only bad thing in the world.]  

The Cato Institute's Mark Calabria is one of the few serious economists [pro-gold economists are by definition unserious] who supports a gold standard. When he talked about it on Glenn Beck's show in 2011, he had to share airtime with a conspiracy theorist from the John Birch Society who once produced a film on chemtrails and wrote a book arguing that vitamin B-17 — which is actually a poison, not a vitamin — can cure cancer. Still, Calabria and this guy were able to agree about gold. [But was that Bircher guy anti-gay marriage? That's the truly crucial information.]

We should also note here at Austrians are not necessarily pro-gold. We're in favor of private money, and if people want to use gold, that's swell for them, but if they want to use other things people value, such as electronic currencies, that's fine too. The important thing is that money not be controlled and manipulated by government agents. What is used for money is something else entirely. Moreover, there is an important middle step that Carter completely ignores here. Let's just free up the money system and let people use what they like as money. Hayek, of course, was famously in favor of Choice in Currency, and the “denationalisation of currency” and there are many variations on this. 
Since Carter is so down on gold, I wonder if he'd be in favor of simply allowing private institutions to issue private currency in something other than the hated gold. Something tells me he wouldn't be. 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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