Monday, April 20, 2009

Not worth its weight

In spite of being a big fan of libertarian thought and greedily lapping up everything dished out by Paul and Co., I have always been deeply uncomfortable with libertarians' fixation on the gold standard. While gold seems like a good proxy for value of any economic activity because of its rare and limited presence, it seems pretty arbitrary, like having a month being defined by 30 gusts of wind rather than that many appearances of the sun.

In a pretty well-written piece called Putting the Toothpaste Back into the Tube, Andy Kessler argues:
"...(for many centuries), gold and silver were the money supply. It's the only thing people would trust. They are rare earth elements, which means there is only so much of them. Hence stable money supply. Gold, even today, increases by about 1 percent every year from new discoveries. With a gold standard, money supply would grow 1 percent, which everyone used to think was just right.

But there are a couple of problems with that whole 1 percent business. The new wealth from more gold goes to the miner who found it, and then it starts circulating in the economy so others can use it. Doesn't seem quite fair. Plus, the 1 percent yearly increase in gold and therefore money supply basically covers population growth and completely ignores productivity and innovation, which get stifled because there's not enough money to increase output, even with new tools and inventions.

So a gold standard implies a static world.
Not that I agree with any of Kessler's Keynesian presumptuousness in the rest of the article, but the part about the gold standard is nicely put.

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