Gold Gets No Respect
Fed Chair-in-Waiting Benjamin Bernanke is a "Great Depression Buff", reports the Wall Street Journal. Based on extensive research, he has drawn some important conclusions:
- Beware of outdated orthodoxies such as the gold standard.
- The Fed's key objective should be stable prices.
- Don't try to prick asset bubbles.
The problem, as Chris Mayer writes, is that Bernanke read the wrong books. The most important neglected work is Rothbard's America's Great Depression. Mayer writes:
- If every dollar must be backed by a certain amount of gold, then you cannot create money out of thin air. The gold standard says you must have the gold first. Governments find it harder to wage war, dole out entitlements and build public works with a gold standard tying them down. Banks can’t lend as much money; hence they can’t make as much money. This is why the banking interests of this country backed the creation of the Federal Reserve. They appreciated the value of a good cartel.
It’s a bit like a cash-only bar. People with little money who like to drink tend not like cash bars.
The problem, Mr. Sameulson, is not that there was not enough gold. The problem was too many dollars. When Roosevelt ordered Americans to surrender their gold coins in the spring of ’33, he was not saving capitalism. He was burying it.
And my take on Bernanke and deflation.
Comments (15)
"The problem, as Chris Mayer writes, is that Bernanke read the wrong books. The most important neglected work is Rothbard's America's Great Depression."
In addition to reading Rothbard’s “America’s Great Depression�, Bernanke's should also read Benjamin Anderson’s notable book "Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946.� While I do not believe that Anderson fully adheres to the monetary and business cycle framework of Mises and Rothbard, his analysis of the 1920s, nevertheless, generally compliments that of Rothbard's. Anderson actually lived through this period and was a major commentator on the events. Anderson argues that the New Deal actually began in 1924 with the Fed's rediscounting operations. In fact, Chapter 16 of Anderson’s book is entitled “Depression and Rally of 1924—The Beginning of the New Deal�. Anderson's is definitely not the conventional analysis, which argues that there was little, if any, government or Fed interference with the economy or financial system during the 1920s. However, both Rothbard and Anderson document that the Fed, for a number of reasons, manipulated, i.e., artificially lowered interest rates, during the 1920s, and it is this action that according to Austrian Business Cycle Theory is the root cause of the business cycle.
Published: December 9, 2005 7:49 AM
Reading the WSJ's excerpts on Bernanke's writings was even more hair-raising than just the helicopter bit. It seems beyond coincidence that Gold is shooting the moon at the same time that Bernanke is taking over the dollar factory.
How about Samuelson's article in the WSJ yesterday about the unfathomable mystery of the recent price increase of Gold? Only by equating inflation with price increases (esp. as measured by the government) could this be unfathomable.
Published: December 9, 2005 8:10 AM
The other issue in all this that I believe is the primary cause of the Depression, recession in Japan and "deflation" in general is protectionism. In the 1930s the tariffs squashed international trade. Then and now, international trade provides more of the profit to business than the ultra competitive US market. It also provides a wider range of foreign goods and services that compete and force local suppliers to better themselves.
When the profitable trade between nations stopped in the 1930s, the consumer had fewer choices and higher prices and suppliers were left with less competition and less profit. So consumers stopped consuming waiting for more choices. This changed a drop of 50% in the US finanacial markets into a world wide depression.
The funny part is in the Depression like in Japan in the late 1990s, the solution was more free trade, less government spending and less currency creation. What they got was the opposite and a 10 year long deep recession. More access to financial markets for individuals would have helped as well.
Published: December 9, 2005 8:26 AM
Well, the guns of August are taking notice of gold, I see. Beware! The empire will strike back and take gold back down- for a while, at least.
Published: December 9, 2005 8:38 AM
At the core, Professor Samuelson and most of the economics profession (and public) believe that an increase in the quantity of paper tickets and electronic accounting entries used as the medium of exchange can cause a sustainable increase in the quantity of non-money goods and services produced. Also fundamental to their fallacious thinking is the belief that a stable “price level� indicates, or contributes to, overall stability of the real (non-monetary) economy. The surprise that Professor Samuelson and many others have regarding the price of gold flows from their position on these two topics, as well as from their incorrect definition of inflation, which was pointed out by Mike in his posting.
Published: December 9, 2005 10:14 AM
"How about Samuelson's article in the WSJ yesterday about the unfathomable mystery of the recent price increase of Gold?"
This is why I don't find WSJ.com to be worth $99/yr*. Samuelson is the same idiot who predicted that the USSR would overtake the US in terms of production and wealth. Unfortunately, he hasn't paid the price for his idiocy, like Irving Fischer did when he bet his fortune (or, rather unfortunately for his wife, his wife's) on the idea that the US economy had entered an eternal stage of prosperity in the late 20s.
These mainstream academics claim to value prediction so highly. Yet, they honor those who make the absolute worst predictions: Samuelson, Irving. When the dollar and gold were severed, mainstream economists predicted that the price of gold would drop to it's non-monetary value of somewhere around $10.
So, why exactly should anyone care about what they have to say?
* Hint: Subscribe to an RSS feed of WSJ.com and its sections. If you find an article you like, get it through your local university's online article system.
Published: December 9, 2005 10:21 AM
"Even at $500, Gold is still a barbaric relic". I wonder if it is still a barbaric relic at $533, which was the latest number today. Well, of course, The Economist undoubtedly thinks that...
Their argument against gold is interestingly 1) That it yields nothing and 2) That central banks will sell it.
Yet, real short-term interest rates is below zero in the U.S. and the Euro-zone and only slightly above zero in Japan, so this argument does not hold. And regarding 2) Some "emerging economy" central banks, most notably Russia, have acually talked of increasing gold holdings.
Published: December 9, 2005 10:24 AM
The real question is why, if it really is a barbarous relic, the central banks didn't unload all of it a long, long time ago, and at far higher real prices than prevail today?
Published: December 9, 2005 10:29 AM
I believe the real reason for the hatred of Gold by mainstream econs is their love affair with inflation and government spending. They claim not to believe in Keynes any more, then turn around and adopt his doctrines. My son took an econ class in college recently and the professor spent a day trashing Keynes, then proceded to teach his ideas the rest of the semester. It really confused my son. No economist is going to admit that they value inflation and high levels of government spending, so they trash gold, which would eliminate both.
Published: December 9, 2005 10:42 AM
I brought this article up yesterday in a post here. I outblogged you! Err, just kidding...
Published: December 9, 2005 12:11 PM
"The real question is why, if it really is a barbarous relic, the central banks didn't unload all of it a long, long time ago, and at far higher real prices than prevail today?"
Along the line of Yancey's observation, if gold really is a barbarous relic and/or a fetish, why did the U.S. government, ultimately at the point of a gun, confiscate the gold, the property, of the citizens of this country in 1933? On one level, this is another great example of "do as I say, but don't do as I do". On another level, despite all the rhetoric to the contrary, governments understand the importance of gold.
Published: December 9, 2005 12:14 PM
Didn't the Fed just reiterate a few weeks ago that all the gold in the nation may be confiscated at the whim and choice of the Fed Gov't if it deems such a confiscation necessary?
Now, why would the gov't want to possibly outlaw (and take for itself) the ownership of an old-fashioned and apparently worthless metal??
Published: December 10, 2005 12:57 AM
"all the gold in the nation may be confiscated"
Link?
If this is true, I'm moving out of the country.
Published: December 10, 2005 1:44 AM
TH,
Good-bye and good luck:
http://www.usagold.com/cpm/Hoppe.html
(And for what it's worth,I recommend one of the Caribbean or Central American tax havens.)
Published: December 10, 2005 8:51 AM
The funny part is in the Depression like in Japan in the late 1990s, the solution was more free trade, less government spending and less currency creation.
I'm not sure if this is completely true. I have the impression that Japan massively increased government spending in the 90s, hence the huge number of fantastic (and quixotic) public engineering projects such as building an airport in the ocean (on quicksand, apparently) and building the world's longest suspension bridge (in a major fault zone).
Published: December 10, 2005 11:12 PM