-- Posted by Neil H. Buchanan
My new Verdict column picks up on a point that I made toward the end of my October 14 Verdict column, in which I noted the worrisome resurgence of "gold bugs" on the left and far right of this country. It is, of course, not possible to say anything genuinely new about the gold standard, but I think I made at least one point that is not widely understood.
Defenders of the gold standard extol its virtues as a neutral, mechanical, "free of human intervention" system that naturally equilibrates the economy. All Congress has to do, they say, is set the ratio of dollars to gold once and for all, and everything will spin like a top thereafter. When pressed about the volatility of the world gold market, and the effect that such volatility would have on the economy, however, the answer is that the dollars-to-gold ratio can be adjusted in response to swings in the gold market.
At that point, however, the gold standard is revealed to be no different from the hated Federal Reserve, because we would need to have human intervention after all, and we would never want Congress to be directly responsible for making technical adjustments to the money supply on an ongoing basis. Something like the Fed, or what I ironically termed a "Gold Fed," would be required. We would end up with a system that is no more safe from human meddling than before, but it would add the inherent waste involved in tying everything to gold.
The Gold Fed, moreover, would be necessary to develop and enforce the regulations that would be a necessary part of a gold standard (even a gold standard that did not allow changes in the dollars-to-gold ratio). The idea that a gold standard -- or any monetary system -- could run without an administrative regime is absurd, after all, because a gold standard does not actually require transactions to be carried out in gold. It only requires that dollars be "backed" by gold, which would be held "in reserve" somewhere. Once that separation is allowed, the possibility of fraud -- and the necessity of enforcement -- naturally follows. (And if we really outlawed paper currency and electronic transactions, and required every transaction to be carried out in gold, we could kiss even a pre-modern economy goodbye.)
The circular and self-negating nature of the defense of the gold standard (and the attacks on the Fed) is highly reminiscent of the attacks from some of the same people on the IRS. Various politicians on the right have talked for years about "shutting down the IRS." What would we do without a police force to enforce the tax laws? Well, we could create a new agency to do that. Or we could create an unfunded mandate to have state tax agencies (all of which, of course, heavily rely on the IRS for expertise, data, and enforcement assistance) take over the IRS's duties. It ends up, as I have argued before, being an exercise in re-labeling and reassigning the same responsibilities.
It is, of course, possible that the IRS and/or the Fed are subject to some sort of incurable internal rot, such that shutting them down and starting over would be a net plus. Which requires that we look at the track records of the two agencies. As I noted on Dorf on Law and in a column early last year, attempts to demonstrate systemic abuse at the IRS have repeatedly come up dramatically empty. The case against the Fed is equally weak.
But is it not true that the Fed was created to end the cycle of boom and bust that plagued the economy throughout the 1800's, yet the economy still experiences booms and busts? Yes, and yes. That, however, is not a sign of failure, but rather proof that nothing can be perfect. The amplitude of the booms and busts in the Fed era has been dramatically reduced. Even the Great Depression was a piker (both in severity and length) compared to some of its predecessors. (See a summary of the data from the late 1700's forward here.) Moreover, the Great Depression itself became more severe after the Fed in 1930-31 failed to carry out its mandate to act as lender of last resort. That proves that agencies can fail, but not that the Fed is so chronically bad that a Gold Fed (or certainly a rigid gold standard) would be better.
In the current situation, the Fed did exactly what was necessary when the financial system was on the brink in late 2008, and it has done everything right (at least in kind, although some hardliners on the Fed have unfortunately reduced the degree) since then. Even so, the Fed is a perfect whipping boy, because anyone who is sufficiently motivated can find something that the Fed did, or failed to do, to cause any problem. Like the more general claim that problems are caused by "government intervention," the reality is that there is no non-interventionist baseline in a system that is (like the financial system) defined and made possible by the government and its regulators.
In any case, I would rather live through the booms and busts of the Fed era a hundred times than to live even once through the booms and busts of the pre-Fed era of non-fiat money. Nothing in the record suggests that the Fed (or the IRS) is subject to anything remotely resembling systemic decay, making it especially inappropriate to think that shutting them down and starting over with new agencies would be worth the extremely high costs involved.
To be clear, I favor targeted reforms to address problems as they come to light. As I note in my new Verdict column, for example, there is probably a good case to be made to change the way the Fed policy committee's voting members are selected. But the arguments to "end the Fed" are beyond flimsy.
As a final side note, I should point out that the title of my new Verdict column uses the word "glisters," rather than "glitters." This is arguably pedantry, but given how seldom I am able to talk about literature, I admit to being somewhat pleased with myself that I remembered (without looking it up) that Shakespeare used "glisters" in his play. To my 10th Grade English teacher, Mrs. Brady, I can only say: "For this, and for being a dedicated teacher to generations of students, thank you!"