Cowen on gold

Tyler Cowen comes out against the gold standard and free banking.

Share this

It's rather amusing how the

It's rather amusing how the opponents of the gold standard can't make up their minds whether the problem with a gold standard is that gold is too hard to produce or too easy, or sometimes both. It is hard to take seriously anyone who opposes the gold standard because it limits the degree of control that government can exercise over the economy. That's like tavern owners opposing Prohibition because it reduces their business. Prohibition may or may not be a good policy, but it is hardly a valid theoretical argument against it to say that it may partially achieve its intended ends.

The ONLY real purpose of a gold standard is to limit the ability of governments to inflate the quantity of money for political ends.

For a number of reasons, including fractional reserve banking, no historical gold standard has ever been, or could ever have been, more than partially successful.

When distilled to its essence, an implementation of a gold standard is an attempt to produce a money whose marginal cost of production only falls short of its exchange value by a rate of profit in line with the general rate of profit in the economy, and whose real marginal cost of production is both substantial and relatively stable. This would mean that there would be no general incentive to produce money instead of other goods and that changes in the demand for money would result in changes in supply generally tracking demand as the profitability of producing money rises and falls.

No actual gold standard could ever meet these goals, but the proper basis of comparison is with politically-driven money, and not with perfection.

Regards, Don

Don, No actual gold standard

Don,

No actual gold standard could ever meet these goals, but the proper basis of comparison is with politically-driven money, and not with perfection.

Exactly. People who oppose the gold standard or free-banking point out their imperfections, but then they make the supreme leap of therefore advocating fiat currency. If the gold standard or free-banking are imperfect, fiat currency is downright dangerous.

When distilled to its essence, an implementation of a gold standard is an attempt to produce a money whose marginal cost of production only falls short of its exchange value by a rate of profit in line with the general rate of profit in the economy, and whose real marginal cost of production is both substantial and relatively stable.

Could you elaborate on this point? I understand the drawback of having a currency whose marginal cost of production is essentially zero. But what do you mean by the 'general rate of profit in the economy'?

Jonathan, Exceptional levels

Jonathan,

Exceptional levels of profit attract high levels of investment. This investment in turn may reduce the marginal cost of production even further.

A zero marginal cost of production and a 100% profit margin may not be much less effective in limiting production than a 50% profit margin, which is still far above general rates of profit.

Regards, Don