Monday, March 16, 2009

Defend the Gold Standard (Bob Murphy)

Bob Murphy debunks some stupid arguments against the gold standard:

For some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."

Early in his essay, the Bloomberg commentator Michael Sesit gives a rapid-fire sequence of flaws with the barbarous relic:

A return to the gold standard, where countries peg their currencies to a given quantity of the metal and thus to one another, is a bad idea. Gold-based monetary systems are overly rigid and restrictive, possess a deflationary bias and can be volatile. They make long-term inflation dependent on the pace of mining output in places such as China, South Africa and Russia.

Let's take these one at a time. To criticize a monetary system based on gold as "rigid" only makes sense if you believe that printing green pieces of paper makes a country richer. After all, the only rigidity enforced by the gold standard is on the central bank's use of the printing press. Requiring the government to maintain a fixed dollar/gold exchange rate is "restrictive" in the same way that the Bill of Rights limits the discretionary power of the feds.

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