Editorial Graveyard- Part IV: Opinion Piece- Gold-Backed Stablecoins Solution to Bitcoin’s Instability

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Rejected by FEE

In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value; for the year and 35% within June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

There is a digital currency alternative that is not only less volatile; but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. It is possible to have gold-backed private money, that blends the advantages of cryptocurrency with the value stability and historical salability of gold. Effectively, the best of both worlds, adopting the best attributes of both monetary assets.

What are Stablecoins?

The term stablecoin is thrown around, but what is it? It is a digital currency with value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability throughout human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. The reserve ratio requirements for gold to token backing and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilize Ethereum-based smart contracts.

Gold-Pegged Stablecoins Offer a Superior Value Proposition 

The most notable difference between Bitcoin and a stablecoin like Tether Gold is the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and fluid cross-border payments conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Gold-Backed Stablecoins Are More Stable Than Unbacked Cryptocurrencies:

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence.

The Convenience of Gold Collateralized Stablecoins:

When compared to physical gold and ETF gold funds, gold-backed stablecoins have a greater degree of convenience. Gold-backed stablecoins are frequently compared to ETF Gold Finds, but “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..” While redemption in fiat currency was maybe more convenient from the standpoint of liquidity, most users are opting to obtain a currency with no instinct value (prior use). Even though those that opt to invest in gold stablecoins, there are inherent counterparty risks.

In comparison to physical gold and ETFs the ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. Plus, the unencumbered cross-border transactions make it an excellent universal medium of exchange. 

Many people may still hold a healthy amount of skepticism regarding stablecoins tied to reserves of gold. After all, there requires a high degree of institutional trust for such an arrangement to transpire. However, this may be the last shot we have at establishing a gold standard. The political interest to maintain current easy money policies is too tempting for the Federal Reserve and politicians to maintain. Beyond the macroeconomic goals of full employment and price stability, Fiscal QE can be used to fund government projects ranging from wars to universal basic income, making irresponsible monetary policy a tempting lever for political gain. In the post-Bretton Wood era, the only way to avoid the bargaining chip of an elastic money base is privacy money with fixed commodities controlling the overall monetary supply. The political interests are so strong even if we had Ron Paul in the Whitehouse, easy money types would get their way on fiscal and monetary issues. The only way to ever obtain a gold standard will be from a private monetary regime.

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 3)

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The Benefits of Gold-Pegged Stablecoins?

Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of  1:1 token to gold-backinglow transaction feesa safe-haven hedge against instability and inflationlow buy-in requirementslow transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives. 

Standard Cryptocurrency vs. The Midas of Digital Money

The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence. 

Gold-Backed Stablecoins and Gold ETF Funds

Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care. 

ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms. 

The Benefits Over Physical Gold

Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. 

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 2)

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What are Stablecoins?

The term stablecoin is frequently thrown around by those initiated in the crypto-space, but what is it? It is a digital currency value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability over the course of human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. While the reserve ratios for gold to token parity and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilized Ethereum-based smart contracts (ERC-20 protocols).

Bootleggers & Baptists: LIV- Going Cashless

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In an age of digital banking, physical cash has become a cumbersome relic of a bygone era in the eyes of most Americans. It is easy to assume that we would all be better off in a cashless society, taking the lead of nations such as Sweden. The belief is that we would be better off in a digital monetary regime that would facilitate tax collection and tracking of criminal activity (p.2). Only demonstrating the tensions between law enforcement interests and the Fourth Amendment rights regarding financial crimes (p.3). Does the question become who benefits from the United States eliminating the use of money? It should be abundantly clear that it is axiomatically true that every policy selects winners and losers. The decision to abolish physical cash transactions is no different.

In the fashion of Bruce Yandle’s Bootleggers and Baptists (1983) theory of political coalitions, for every policy prescription; there is a moralizing agent and a beneficiary. In his 2018 paper, Norbert J. Michel, Special Interest Politics Could Save Cash or Kill It, details the parties that stand to benefit from the relinquishment of cash transactions. Some of the most conspicuous parties that prosper from a cashless society would be law enforcement, with a digital record of every economic transaction, it is hard to obscure illicit conduct. There are parities in the private sector that would find the move to electronic transactions advantageous. The credit card companies are likely one of the most salient groups of Bootleggers of anti-cash policies. The CEO of Mastercard has been a vocal exponent of getting rid of cash; it was even the first company to openly lobby on “… the behalf of bitcoin..” (p. 8). Any move towards digital payments over tangible currency would fatten the pockets of creditors. All credit card transactions are digital; it is not that farfetched to suspect that individuals who use cash would be more apt to use their Mastercard.

Other than law enforcement officials, who are the holy rollers of killing the dollar? One needs to look no further than the late Arizona senator John McCain, as he was an advocate of the COINS Act. This was a measure that was purposed to suspend production of the penny for approximately a decade. McCain defended this policy because it cost more than the actual monetary value of a penny to produce the coin. Very few American consumers would miss the penny; only twenty-six percent of transactions in 2018 patrons used pennies. Why would anyone miss a burdensome form of currency that cost more than what was worth to produce? It is important to note that McCain’s COINS bill did not dispense with copper coinage.

“ In addition, the bill provides for: (1) modifications to the composition of the five-cent coin; and (2) the replacement, in circulation, of $1 notes with $1 coins.”

The legislation would merely shift production towards the presumably more lucrative seigniorage of dollar coins. It would be naïve to not consider the local business interests in McCain’s home state of Arizona. Arizona has long held the reputation as a top copper producer and is the second-highest producer of natural minerals of any of the states. For a state that constitutes seventy percent of all cooper output, the COINS Act provides these firms with concentrated benefits. The COINS Act and the Arizona cooper industry are even Bootlegger and Baptists dynamic outside of the cashless society debate.

Bootleggers and Baptist:L- Addendum: The Axiom of Monetary and Bank Regulation; The Fed Always Wins.

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The enduring axiom of fintech and digital asset regulations and taxes; barriers to entry benefit the legacy banking system. Because legal restrictions and taxes reduce incentives to participate in the financial services markets. There may be other parties that benefit from placing limitations on cryptocurrencies. Ultimately, the banking establishment enjoys diminution in competition. Many factions within the pro-regulation coalition, advocate for the regulation of cryptocurrencies and fintech services, often under the veil of consumer protection. For example, Elizabeth Warren likened Bitcoin to the 2008 Housing Bubble. Whether Warren stands to gain or not from regulating cryptocurrencies is immaterial; such behavior is merely doing all the dirty work for the Federal Reserve and the large banks with Fed fund accounts. That is to help mold public opinion to be receptive to crypto regulation. Ironically, she is unwittingly aiding and abetting the same banking system she purportedly to wants to reform. Most consumer protection measures pick winners and losers. Regulating crypto arguably picks the wrong set of winners that would not stand a chance of victory in the face of natural market pressures.

Bootleggers and Baptist:L- CBDC

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One of the hot topics in global discourse aside from the Ukraine conflict is research into CBDC (Central Bank Digital Currency). Several countries are researching deploying a CBDC and some have even implemented trial run experiments with centralized digital monies. Back in January, the US Federal Reserve published its CBDC white paper Money and Payments: The U.S. Dollar in the Age of Digital Transformation (2022). Hypothetically, if initiated, the Fed would distribute retail CBDC through private intermediaries (primary dealers). Per George Selgin: “Those private intermediaries would then be responsible for managing customers’ central bank digital currency (CBDC) holdings and payments…”. Allowing the Fed to avoid managing the front-end customer service concerns (something government entities typically handle very poorly) and reallocate this function to private firms.

Baptists:

The overall rhetoric surrounding CBDC has been cautiously optimistic. Especially, when squared against the comparisons made between CBDCs and stablecoins. Federal Reserve Chair, Jerome Powell, has backtracked on his anti-stablecoin stance. Presumably, he still is championing a central bank currency over. Despite the institutional tensions between stablecoins and CBDC, the Fed; could be considered a Dual-Role Actor in the Bootleggers and Baptists (1983); if it is not categorically correct to deem them Baptists. There is a strong possibility that the Federal Reserve and all affiliated employees stand to gain from curbing the success of privately issued digital currencies but also sincerely believe in the virtues of the United States issuing its own. There are several arguments in favor of a government-backed digital currency supported by Fed economists and academics alike. For example, it would make assessing taxes on purchases made with digital currencies easier to determine (p.156). Also, many experts claim that a CBDC would achieve price stability, an attractive feature when you consider the historical volatility of various well-established private cryptocurrencies. It would be easier to combat money laundering and financing for terrorist activities(p.11). Probably one of the more laudable arguments for a CBDC is the argument of financial inclusion for the unbanked (p.157). All of these claims have a moralistic tone, making the Fed and CBDC friendly economists potential Baptists.

Bootleggers:

Labeling Fed officials as the Bootleggers is analogous to shooting-fish-in-a-barrel and makes for linear analysis. Plus, yes, the United States central bank and all of its economists have much to gain through promoting a CBDC; however, it is not entirely evident that they are disinterested in the moral arguments for protecting the public from the purported dangers of a private digital currency and the cause of financial inclusion. But there is a group of beneficiaries that are much less obvious to the superficial observer; hackers. A CBDC would be highly centralized, making it more likely that there could be a single point of failure in a security breach (p.17). Even though the public and permissionless blockchains are only quasi-anonymous on distributed ledgers of cryptocurrencies such as Bitcoin, they are trusted, specifically for these validation channels in the consensus protocol are decentralized. In contrast, a CBDC would need to comply with KYC and AML requirements making it necessary to “…store personal data..” on specific nodes; “… highly likely to be exposed to a single point of failure, which can result in the indirect leakage of personal data..” (p.18). Due to the legal provisions outlined in financial monitoring laws, turns CBDCs into an aggregated database for financial and personal information if improperly designed.

Bootleggers and Baptists: XLIX- Keynesianism, Stimulus, and Political Manipulation

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Frequently in economics, the views of a specific theorist are exploited for the interests of various political factions. The most salient examples are economic theorists are labeled as “free market” economists. Conservatives generally celebrate Adam Smith as a defender of unfettered commerce but conveniently ignore his concern for the blight of the poor. Smith was too multidimensional to be distilled to a simplistic bumper sticker slogan. The great F.A, Hayek suffered from a similar syndrome as many Conservative and Libertarian pundits disregard the nuances of his work and paint him as radical. However, there are also instances of the intellectual advances of various theorists being embellished by their opponents for partisan purposes. For example, the moderate and subtle rationalizations of James M. Buchanan are characterized as extreme libertarianism. Nancy Maclean is unacquainted[1] with the work of Murray Rothbard!

The inaccurate framing of economic theory for political interests is not limited to right-of-center economists. Many left-wingers exaggerate the beliefs and postulations of their favored economists, the most conspicuous example being the abuse of John Maynard Keynes [2]. Yes, in the eyes of most Conservatives and Libertarians, Keynes had a flawed perception of market processes. Although, he was not communist. Keynes still had some semblance of a pragmatic filter, which placed constraints on his sanguine view of consumption. Keynes did believe that after the end of an economic downturn, deficits should be eliminated. Therefore, Keynes did not advocate for a policy of perpetual deficit spending, most likely would take issue with the massive debts amassed by the United States over the past couple of decades.

It wouldn’t be outlandish to examine the embellishment of Keynesian economics for political gain from the precepts of Bruce Yandle’s Bootleggers and Baptists (1983) coalition paradigm. A political relationship between various factions of policy advocates where some supports sincerely believe in the normative intention of the policy (the Baptists). In contrast, the tacit beneficiaries (the Bootleggers) merely ride the coattails of the moralistic advocates (either silently or vocally alongside the Baptists). The support for various stimulus policies would have its share of Bootleggers and Baptists to defend “stimulus spending”. The most recent examples are the Obama-era stimulus programs (American Recovery and Reinvestment Act of 2009) and multiple rounds of COVID stimulus allocations. Often, Keynesianism is justified when it becomes politically suitable to do so. The most recent examples of economic stimulus initiatives exemplify this point quite well. This observation becomes more striking when you consider that the convergence of our monetary and fiscal policy has amounted to a hand-selected bastard-breed mutation [3] of Keynesian economics and Monetarism. The conception of this flawed system is being spurred by policymakers trying to select the most politically advantageous characteristics of both economic philosophies.

We could consider the founder of Keynesian economics the Baptist of stimulus spending policies. As Keynes envisioned stimulus spending as being a temporary remedy amid an economic downturn. Despite his good intentions, Keynes failed to recognize the political incentives to politicians, bureaucrats, technocrats, activists, and even ordinary voters; factors that only serve to reinforce one of Milton Friedman’s most enduring dictums “There is nothing more permanent than a government program”. While stimulus initiatives come and go, policymakers still keep implementing them as a remedy to soothe economic turmoil. Stimulus policies were adopted with little regard for the implied discipline advocated for by Keynes. After all, he was still an economist and was not ignorant of the discipline’s conceptual pillars. Stimulus spending is an unsound policy, but he never intended for it to be at the regular disposal of politicians and lawmakers. Dating back to the observations of Niccolò Machiavelli, politics is a game of perception, not one of technical proficiency. Conversely, economics is ideally a positive social science unconcerned with popular opinion.

Moral values always enter the equation whenever we enter the realm of actual decision-making, even in economic decision-making. Unfortunately, the line between economic science and public perception is often blurred, especially by the adroit manipulation of politically savvy elected officials, activists, lawmakers, and activists. Promising ever-larger transfer of “free” goods and services to the voting public. Applying the principles of concentrated benefits and dispersed costs, voters believe they have made out like bandits. Thereby, forming a mutually beneficial feedback loop of voters believing they have won and political actors presented in a positive light; as being defenders of the common man. Elected officials portrayed as advocates for the “little guy” helps establish social currency with the voting public. Social currency dovetails nicely with a politician’s incentive to remain in their position of political power.

Foot Notes:

  1. Maclean is aware of Rothbard’s work to a superficial extent, but if she sincerely understood his work, she would not be portraying Buchanan as a radical.
  2. The author is not an exponent of Keynesian economics.
  3. Despite the intense debate between Keynesians and Monetarists, both have their commonalities.

Bootleggers & Baptists: XLV- Baptists, Economists, Careers, & QE

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What is Quantitative Easing?

Quantitative easing (QE) is the controversial and unconventional monetary policy tool first introduced in the United States in 2008 [1]; as a countermeasure to the Great Recession. The practice of Quantitative easing (QE) is where a central bank purchases long-term government securities, corporate bonds, mortgage-backed securities, and other assets from banking institutions with newly created money. The ultimate goal is to boost the money supply encouraging lending in a sluggish economy by lowering interest rates. The Federal Reserve’s strategies for managing interest rates are divided into pre and post-financial crisis eras. Before 2008 how the Federal Reserve maintained interest rates were different (operating under a corridor system). Per the New York Federal Reserve:

Before October 2008, the Federal Open Market Committee (FOMC) communicated the stance of monetary policy by announcing a target for the federal funds rate. The Fed would then use open market operations to make small adjustments to the supply of reserves so that the effective federal funds rate (EFFR) would print close to the target set by the FOMC. This type of implementation regime that relies on reserve scarcity is often referred to as a corridor system (as explained in this article). Under this framework, depository institutions, or banks, were incentivized to hold as few reserves as possible since they did not earn interest on their Fed account balances. Reserve balances that banks held in their Fed accounts added up to a very small amount, as can be seen in the next chart. The banking system operated with aggregate reserve scarcity and relied on the redistribution of reserves in an active interbank market.

Amid a phase of quantitative easing, the Federal Reserve injects massive quantities of money into the economy through large-scale asset purchases on the open market, increasing the risk of interest rates becoming too low. In the post-crisis, the Fed has opted to implement a Floor System, where the central bank pays interest on excess reserves (IOER) for funds held by member banks at the Feder Reserve beyond the mandate reserve requirements. Procedurally assists with stabilizing the interest rate (Fed funds rate) even when the Fed pumps vast amounts of liquidity into the economy. The excess money held by Fed-associated financial institutions acts like an interest rate floor; through paying on IOERs the opportunity cost of holding money is eliminated. Effectively, maintaining the target interest rate. The Fed’s convoluted attempt to skirt the Law of Supply and Demand, the Federal Reserve, nothing more than an attempt to have its cake-and-it-too (avoiding a liquidity trap and concurrently stimulating the loans market).

The Baptists and Economists of QE:

The monetary establishment expresses that QE is a necessary and effective policy instrument. The promoting of this interventionist policy has created fertile ground for Bootlegger and Baptists (1983) coalition dynamics. Much of this pro-QE sentiment is perpetuated by the research of Federal Reserve economists. It is hard to pinpoint clear Baptists in the pro-QE coalition, several parties that benefit from defending the practice.

In some instances, politicians who champion QE could be viewed as Baptists, arguing for it as means of stabilizing the economy. However, politicians stand to benefit from the unorthodox monetary policy in the form of Fiscal QE (coined by George Selgin), directing the money created through QE to non-macro-economic objectives (e.g. funding the Green New Deal through QE). There is the potential of politicians assuming the role of “pure” Bootleggers and Dual Role Actors. But while QE could be used to “achieve” macro stability (full employment, etc.) and other extraneous policy goals, it operates as a double-edged sword. It is important to note that the inflation rate is a metric that matters to the voting public. Inflation has become a focal point in political discourse and is politicized (p.129-163[2]. The next logical possibility for  Baptists would-be journalists. However their position on QE is “mixed”. Some outlets like to diagram the pros and cons, others are outright hostile, and some echo the positive sentiments acting as a mouthpiece for the Fed.

There is one faction in the QE advocacy coalition that unquestionably fits the definition of Bootleggers, the economists employed by the Federal Reserve. In the book Money and the Rule of Law (2021) Boettke, Salter, and Smith detail the numerous incentive problems facing Federal Reserve officials armed with “constrained digression” (CH 3; p.58-94). Pollical pressures asides; there are other reasons why favoring QE would be appealing (p.67-70), but also substantial internal pressures as well. The authors expound upon the impact of “bureaucratic inertia” on the central banks; like any other center of governance, there is a bias towards maintaining the status quo (p.64). After approximately fourteen years and four rounds of QE, the policy has become normalized. Initially, QE was an aberration in American monetary policy [3]. Favoring QE in 2022 is an example of institutional inertia, but not during QE1 (2008).

However, the obtuse and obstinate inflexibility of the sluggish nature of the Fed is far from the most troubling rationale for unwaveringly defending QE. That would manifest itself in the form of promotion opportunities. We need to consider that the Federal Reserve is one of the largest employers of economists in the United States (p.64), urging researchers to conform to internal norms of the Fed. (p.65). One paper that beautifully describes the incentives of the career concerns of Federal Reserve economists was Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (2020; revised 2021). In their NBER paper, Fabo, Oková, Kempf, & Pástor found that central bankers are more likely to describe QE in sanguine terms in their research when compared to unaffiliated academics (p.15). Fabo et al. found that there was some evidence that:

“…One possible mechanism is career concerns. In principle, bank management could make promotion decisions in a way that encourages bank employees to assess the bank’s policies favorably… (p.18).

“… We find that the interaction between the effect on output and Seniority is positive and significant. A one standard deviation increase in Seniority raises the sensitivity of career outcomes to the estimated effect on output by about 50%… (p.21).

“..These could involve concerns about the bank’s reputation and, for very senior researchers, concerns about their reputation. Like career concerns, reputation concerns reflect researchers’ incentives because in both cases, a researcher derives a private benefit from reaching a particular research outcome. We have no evidence on the potential contribution of reputation concerns to our results…” (p.25).

We must not interpret this correlation between the promotion of senior economists and research validating the “positive” effects of QE as these actors intentionally manipulate the results. In the absence of sufficient evidence; making such an assessment is made in bad faith, but there is most likely a third variable connecting these outcomes. For example, Fabo et al. describe the potential of economics who end up working for the Fed having priors that make them more apt to favor interventionist monetary policy (p.4 & 25). They even explore the possibility of researchers inadvertently selecting modeling techniques that would make QE appear to be more effective (p.2 & 17).

Footnotes:

  1. The initial introduction of quantitative easing in the US in 2008 was dubbed QE1. In March 2020, the US Federal Reserve initiated its fourth round of QE (QE4).
  2. In Boom-and-Bust Banking (2012) (ed. David Beckworth), Scott Sumner argues for adjusting monetary policy to  NGDP targeting versus inflation targeting. A stance also advocated by David Beckworth. Sumner explains how inflation targeting is more politically appealing than a Nominal GDP target. After all, inflation is very salient, especially if you are old enough to remember stagflation. Side note, the author of this blog post was born in the late-1980s but is an avid fan of economic history.
  3. The policy of Quantitative easing developed in Japan in the early-2000’s and was subsequently implemented in the United States nearly a decade later.

Time to Restore the Gold Standard- Part V(c): Stability

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However, even if the value of the dollar continues to plummet wouldn’t this pattern be more predictable than the oscillations of a gold-pegged dollar? As mentioned previously, the Federal Reserve does not resolutely adhere to its own monetary rules. These deviations tend to be justified if they are done in the name of maintaining lofty “macroeconomic” targets, such as full employment. Thereby creating distortions that can hamper future investment plans and even anticipated returns on savings. The fact that the cadence in the price level has become more sporadic rather than more predictable (p.7) is a firm indictment of the Federal Reserve’s institutional failure. The common myth that the Great Depression was caused by gold rather than the malfeasance of the Fed is a fallacy that needs to be debunked. The common narrative has been the freely fluctuating value of gold drove the United States into one of the darkest eras of our economic history. To directly indicate that the Great Depression was the byproduct of mistakes (p.4) made our central bank is telling. Unfortunately, the economic calamity of the 1930s was brought on by “… Fed ..not constrained in using those reserves to expand base money, and thus the broader money supply..” (p.5). Once again validating the point that it was an issue in exercising fiscal restraint; the Fed capitulating to the impulse to use money as an instrument of political convenience. It is well noted that raising taxes and cutting welfare programs can be highly unpopular among voters. However, utilizing inflation as a circuitous form of taxation disperses the true costs of government spending, effectively hiding these expenditures from the average voter. It may be the rules of the game that have created past economic turmoil that has been erroneously attributed to gold. In all honesty, making the concept of a rules-based approach to monetary policy questionable at best. In most cases, we cannot trust those tasked with the duties to create and enforce the rules to act in the best interest of the economy. 

The failure of our banking institutions to establish monetary stability is epitomized in the duration of economic downturns and the frequency of banking panics. Yes, economic downturns were more frequent before the Federal Reserve, however, they were shorter in duration. On average approximately seven months long and were “..no more severe..” (p.21). Based upon these facts it is reasonable to infer that the intervention of central banks may only prolong economic depressions. The introduction of the Federal Reserve did little to reduce the frequency of banking panics between 1914-1930 (p.24). The greatest irony being that between 1830-1914 Canada had relatively few bank failures and no reported bank runs (p.27). Not only did Canadian banks hold gold-backed currency this period also overlapped with Canada’s free-banking period. During the 19th century, Canada did not have a central bank (established in 1935) and banking was relatively free of any regulation. Despite this period of Canadian banking history committing the Cardinal sins of having a gold standard and no central bank, the nation enjoyed relative economic stability. This example only further erodes the critiques of the gold standard and claims that central banks are an absolute necessity.

Time to Restore the Gold Standard- Part V(b): Stability

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Even most fiat currency advocates understand this point and attempt to utilize various monetary rules to create some sense of expected steady depreciation of the dollar. The pretense of “stability” is merely an illusion engendered by the rigidity of a rule that limited the amount of inflation allotted per year. The rules-bound approach in the United States permits 2% inflation per year to allow for economic growth. In an attempt to achieve the aims of “full employment” and monetary stability. Few question the fidelity to which the Federal Reserve has adhered to this 2 % annual inflation target. For instance, in 2007 during the nascent period of the economic crisis, the inflation rate was a staggering 4.08%.More than double what is conventionally allotted by the Federal Reserve. Demonstrating that these monetary rules that are meant to maintain the integrity of our money supply are sensitive to exigencies of purported economic calamity. It is well documented that the subprime housing crisis that emerged in 2007 was caused by our governing institutions using the money supply to manipulate interest rates. The prospect of the U.S central bank maintaining the value of our money is marred by the fact they do not consistently abide by these rules. Unfortunately, when it is politically convenient to loosen these parameters of these rules, the Fed does so. Generally, they could not anticipate the emergence of an emergency requiring accommodations in their money management constraints. If the Federal Reserve did unwaveringly adhere to the 2% rule this still is not necessarily the type of stability that should be welcomed. Irrespective of the annual rate of economic growth, this is still at the expense of the purchasing power of the dollar. While the rate of inflation may be predictable, it is a signal that the value of our money will only continue to decrease. The goal of holding any commodity is for the value to increase or remain constant not to wither away to oblivion. 

The instability caused by the Federal Reserve failing to rigidity follow its own monetary rules has consequences that reverberate throughout the economy. Prices function as a source of information to consumers and producers, that even includes those that produce and hold various forms of money. If the Federal Reserve has been augmenting the money supply to lower interest rates this distorts the loans markets for lenders and borrowers. The argument that the short-run instability of gold makes it necessary for state intervention in the money markets, does not hold water. As lenders and borrows can enter into contractual agreements setting interest requirements; even adjust for immediate price-level variances (p.32). Any attempt to manipulate the money supply to encourage consumption does nothing more than to manipulate the integrity of the money supply Only serving to encourage economic actors to engage in malinvestment, arguably creating moral hazard. Not only does lowering interest rates alter the money supply, but it also encourages the individual who could not otherwise afford to borrow money to do so. Despite the fact, the natural interest rate of the loan is unproportionate to their income and necessary expenses. Unfortunately leading may make borrowers inclined to take uncalculated risks created by an illusory interest rate. That invariably is unsustainable and eventually will be forced back to natural rates, regardless of any distortions the market will self-correct.

If the Federal Reserve’s management rules are effective at warding off volatility, we would expect there to be wild variances in the value of gold-backed money in the pre-central banking era. After being confronted with the number it becomes quite evident that the facts do not comport with popular opinion. One only needs to review the dramatic increase in the rate of inflation in the post-gold economy to see the full effect. From the period of the period between 1790 and 1913 a $100 basket of consumer goods only experienced an $8 variance ($108 in 1913) (p.5-6). However, that same basket of goods had reached the cost of $2,422 by 2008(p5-6), demonstrating the hasten pace of dollar depreciation. It is calculated that the overall rate of inflation between 1879 and 1913 was a meager 0.01 % on a classical gold standard. It should be noted that similar numbers are reflected in the 93 years Great Britain retained a freely fluctuating gold standard (p.3). How skeptics can deride the notion of gold-backed money without address the long-run stability is perplexing. The political and economic establishment has effectively become short-sighted through praising immediate stability over enduring integrity. There is a deeper underlying question regarding this disjointed preference, what does it say about our society? Has our propensity for instant gratification become so entrenched in our culture that it has bled into our governing institutions? If our purported “experts” exalt the virtues of instantaneous band-aid measures over long-run functionality, then the answer to this question is self-evident.

Time to Restore the Gold Standard- Part V (a): Stability

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The third and final argument of this series for reinstating gold is monetary stability. The notion that pegging money to the value of gold helping ensure its stability to most economists and commentators is laughable at best. Among the intelligentsia, the consensus is that value of gold is highly volatile, and having the dollars tied to such a freely fluctuating asset would be disastrous to the economy. Most notable is how gold fails to achieve short-run price level stability; although, it is generally accepted that it does have a high degree of long-run stability(p.2). Unquestionably there is a tradeoff between long-term and short-term stability when choosing between a monetary regime boasting a fixed-gold standard or a rules-based fiat currency. Upon closer examination, it becomes apparent that fiat currency lacks long-term stability in its value. It only is assumed that there are two core fallacies implicit in the arguments against the stability of gold-back money. One, critics are overestimating the ability of government institutions to artificially sustain price stability. The second and most pervasive assumption is the flawed conception of “stability”. A common concern in any field of study is the question of are we measuring what we profess to be measuring? How we operationally define the fortitude of currency is going to impact how we measure stability. After reviewing the longitudinal variation of the gold standard in comparison to the current fiat standard it is clear that gold has the upper hand when it comes to long-term stability. It is reasonable then to question if we as a society are choosing to favor short-run success over sustained value retention. 

However, one nagging issue that needs to be addressed is whether money is naturally fluctuating or if the value remains fixed. Money in itself is a commodity regardless of what is the currency is backed by. After all, we do have a market for trading foreign currency in the post-Brentwood world; why not consider money as a commodity. The perception of the money goes deeper than the fact that we hold foreign currencies (like a future or security) with the hopes of making a profit. I look back to the insights of the founder of the Austrian SchoolCarl Menger, money often had a prior use as an object with practical utility. As detailed in his book Principles of Economics (1871):

The local money character of many other goods, on the other hand, can be traced back to their great and general use-value locally and their resultant marketability. Examples are the money character of dates in the oasis of Siwa, of tea bricks in central Asia and Siberia, of glass beads in Nubia and Sennar, and of ghussub, a kind of millet, in the country of Ahir (Africa). An example in which both factors have been responsible for the money-character of good is provided by cowrieshells, which have, at the same time, been both a commonly desired ornament and an export commodity. (p.271).

Menger’s concept of money having a prior use function was later encapsulated in Ludwig von Mises’s Regression Theorem.

When individuals began to acquire objects, not for consumption, but to be used as media of exchange, they valued them according to the objective exchange-value with which the market already credited them because of their ‘industrial’ usefulness, and only as an additional consideration on account of the possibility of using them as media of exchange. (p.109-110).

Commodities such as bales of tea or bundles of tobacco demonstrate a self-proclaimed intrinsic value. It is evident people like to consume tobacco and tea as luxury goods, otherwise, these products would not sell. Naturally, making them very saleable commodities on the barter market. But because the double coincidence of wants trade and barter is self-limiting since you may have a commodity that no one else desires, making it necessary for a society to have a uniform medium of exchange. Even fiat currency could arguably have its legitimacy traced back to the days of 100 percent reserve gold warehousing (p.40), a system buried in the sands of history once the United States established a central banking system. The monetized debate we call the U.S. dollar is a distant ancestor to banking receipts for gold redemption.

If money irrespective of its heritage is considered a commodity, then why do we expect the price to not fluctuate? It is understood that economic models are implied to be unwavering and solely for demonstration. When applied, these models are extrapolated rather than assumed to be a direct reflection of economic activity. In theory, if money is a commodity we cannot assume that it will remain stagnantly fixed at the current price level; as with any other commodity, the value of money varies based upon the supply of the good in question. The very concept of a consistently “stable” currency with no variation in the value is flawed at conception. Invariably such an exception of resolute ceteris paribus is nothing more than a fiction. 

Time to Restore the Gold Standard- Part IV: Cantillon Effects

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One concern regarding fiat currency that is appurtenant to inflation is the occurrence of Cantillon Effects. What are Cantillon Effects? The observation is that introducing new money into the economy has “… distributional consequences that operate through the price system…”. Essentially this means that inflation does not occur all at once and does not evenly flow throughout the market. Individuals that receive the money first avoid experiencing price inflation, validating the previous point. Therefore, dispelling the misconception held by the English philosopher John Locke that the nature of money is neutral. Locke suggesting that introducing more money into the economy merely has a numerical impact on prices. The suggestion being that printing more money has little influence on economic behavior. A 17th-century precursor to the contemporary notion of “inflation doesn’t matter”. From a praxeological standpoint, this assumption is wholly false. If it were true, people would not adjust their behavior to account for the inflationary depreciation of their national currency. People would not be investing in gold, silver, or Cryptocurrencies as an alternative to hedge against government money. 

This phenomenon was first observed by Irish-French Political Economist Richard Cantillon, providing its namesake. Cantillon expounds upon the mechanics of such inflationary effects on money through the example of gold mining in his book An Essay on Economic Theory. Cantillon asserts that the point of injection of new currency and the velocity of circulation play a role in its impact. As described below:

If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs, the smelters, refiners, and all the other workers will increase their expenses in proportion to their profits. Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and having more ornate houses and other desirable goods. Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures. All these increased expenditures on meat, wine, wool, etc., 0necessarily reduces the share of the other inhabitants in the state who do not participate at first in the wealth of the mines in question. The bargaining process of the market, with the demand for meat, wine, wool, etc., being stronger than usual, will not fail to increase their prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first, the property owners, during the term of their leases, then their domestic servants, and all the workmen or fixed-wage earners who support their families on a salary. They all must diminish their expenditures in proportion to the new consumption, which will compel many of them to emigrate and to seek a living elsewhere. The property owners will dismiss many of them, and the rest will demand a wage increase to live as before. It is in this manner that a considerable increase of money from mines increases consumption and, by diminishing the number of inhabitants, greater expenditures result from those who remain (p.148-149).

It is important to note that Cantillon Effects occur with currencies with a fixed supply. In Cantillon’s example above, he uses the mining of gold ore to describe the disparate impact of inflation on prices. A similar consequence is also observable as a byproduct of Bitcoin mining. However, these examples of Cantillon effects are far less pronounced than those resulting from creating more fiat currency. These disturbances are temporary (p.28) and are not indicative of permanent debasement of either commodity. A continual depreciation of money with no longitudinal guarantee of appreciation makes a currency a poor store of value. Gold, cryptocurrencies, and silver have the possibility of increasing in value. Therefore, neutralizing the short-run inflation generated by a new gold discovery. Fiat currency collective continues to depreciate across time, thereby displaying the validity of the Humean Price-Specie-Flow Mechanism model. Essentially disturbances in the gold supply would naturally adjust and levitate back to equilibrium with no further intervention. Above all demonstrating, that any disparities would be temporary under fixed-money supply standards such as gold. Effectively weakening the validity of the objections that gold is an ineffective policy tool for combating the harmful effects of inflation. Including Cantillon Effects. 

The above passage from Cantillon demonstrates how individuals with close geographic or institutional proximity to the point of monetary injection enjoy the benefits. The modern-day equivalent would be working in the financial district of New York City. Financiers on Wall Street may even have connections with staff working at the New York Federal Reserve. Well-connected social networks in the financial sector are advantageous when it comes to acquiring access to money. Even beyond the social networks of well-connected financiers, the privileged position of those benefitting from Cantillon Effects starts with the Central Banks. Upon wielding newly printed money, they possess a profound amount of “.. unearned purchasing power..” (cannot find source) analogous to a counterfeiting operation. The currency flows from the Federal Reserve to the Medium and Large-sized banking institutions that “maintain reserve accounts” at various Fed locations throughout the United States. Smaller banks (e.g. local credit unions) obtain their money supplies from correspondent banks that have accounts with the Federal Reserve. These larger banks supply smaller banks charge the smaller banks a service fee for distributing their allocation of currency. This distribution dynamic illustrates how patrons of neighbor banks are at a clear disadvantage. From a temporal standpoint, the large corporate banks are among the first institutions to receive the newly printed money. Providing access to the new currency to the employees and patrons of these larger well-connected banks. Individuals living in rural regions of the united states are either unbanked or needing travel great distances for banking services. The disparate effect of this geographical allocation of new money is made worse by the higher poverty rates experienced by rural areas of the U.S. The individuals afflicted the most by poverty are the ones who suffer the most from price inflation. Serving to substantiate the consequences of Cantillon Effects as a form of regressive taxation. By the time the rate of inflation has caught up to consumer goods, the government has already funded the programs the politicians wanted to implement. Those with institutional ties closer to point of entry have already invested or spent the money before inflation is reflected in higher nominal costs of consumer goods. 

Time to Restore the Gold Standard- Part III

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One of the defining arguments for justifying a gold standard is that it guards against inflation. What is inflation? Inflation is the depreciation in a currency’s purchasing power over time, increasing the nominal prices of goods and services. A gold standard combats inflation due to the limited quantity of gold. The cause of inflation is the introduction of money currency into the economy. Abiding by the immutable law of Supply and Demand, the more of a commodity we have, the lower its value will be, which also applies to money. A principle that was demonstrated in the currency crisis afflicting Weimar Germany. The massive supply of German Marks leads the country to experience hyperinflation. The German mark became virtually worthless as a medium change. At the height of this financial disaster, a loaf of bread cost $100 billion! Right before the German mark collapsed. 

The astronomical prices and economic penury caused by hyperinflation is the most extreme outcome of overprinting fiat currency. There are several other less severe consequences of inflation. For instance, inflation reduces the incentives for people to save money. If your savings are withering away by the continuous erosion of inflation, there is no in leaving your money in a savings account. One way many wealthy entrepreneurs avoid the stealth tax of inflation is through investments. Real estate, business startups, bonds, stocks, and securities have the potential to increase in value. In comparison, an inflationary dollar can only decrease in value. The stock market may be a gamble, but hedging on a fiat currency is a losing strategy. 

The customer suffers dearly due to the harmful effects of inflation. The most obvious consequence is inflation resulting in higher prices. Functioning as a paradox because one would expect prices to decline because of increased efficiency from technological innovation. Since inflation increases the price of all goods including input the price of consumer goods rises. A continuous increase in the money supply also results in a “cheapen” of consumer goods. Producers feeling the pinch of inflation on productions goods cannot directly transfer these costs to the consumer. However, producers elect to reduce portion sizes or reduce overall product quality. Restaurants using downgrading the grade of meats they serve, readymade food producers reducing packaging sizes, clothing manufactures using less durable fabrics. Not only are we paying more for everyday goods, but we are also paying more for inferior goods!

The inflationary monetary policy enabled by a fiat money standard impacts more than thrift and prices. Money creation being disconnected from the constrain of fixed assets backing the currency has led to several troubling practices in macroeconomics. One of the most notable examples has been the manipulation of interest rates. Typically interest rates are artificially lowered to encourage consumption during economic lulls. Achieved through expanding the money supply, with the injection of liquidity it becomes less expensive to lend money (remember the concept of supply and demand). Even exponents of this tactic acknowledge that this alteration to the interest rate is only temporary. Interest rates below the market rate are unsustainable. Influencing people to makes investments that they cannot afford at natural interest rate levels, creating economic bubbles. Those who can no longer afford the real interest rates end up defaulting on their investments. One of the most salient examples in the recent history of such disastrous collective malinvestment was the 2008 Housing Crisis. The housing market and adjacent industries were decimated by the burst bubble. Overall, resulting in over 2 million foreclosures in 2008 alone. Demonstrating the hazards of institutionally endorsed market distortions that could only be executed on a pervasive scale under a fiat currency standard!

The tight constraints of a currency pegged to a precious metal have often been expressed as a concern. Frequently, being used as an argument against a gold standard. Particularly the need for liquidity during a supply shock. It could be theoretically justifiable to have some flexibility in the money supply to fund unexpected expenditures. One example being emergency funding for implementing measures to combat COVID-19. However, the purse strings have been loose for decades. Featuring only brief periods of modest austerity measures implemented. The inexhaustible need for more government funding has developed into a deeply rooted dependency. That not only adversely impacts the character of our governing institutions but also that of the citizens. The people begin to demand more entitlement programs. Typically, with little regard for the costs of such initiatives. Arguable making inflationary monetary policy cleverly camouflaged form of fiscal illusion. The American people already have social security and several other federal entitlement programs, but this is not enough! Now universal health care and free college tuition are mainstream policy talking points. Illustrating America’s growing and insatiable appetite for publicly-funded entitlement programs. Simultaneously, displaying the hideous character flaws of thievery, profligacy, and gluttony.

Time to Restore the Gold Standard – Part II

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Part I

Many arguments are defending maintaining a monetary regime centered around fiat currency. However, what are some of the justifications for returning to a gold standard? The current money creation operations guided by the Federal Reserve do not serve the best interests of the American people. Even in monetary regimes that utilize constraining rules such as Nominal GDP Targeting, this only limits the amount of percentage of debasement allotted per a specified time frame (typical a year). But this does little more than slow down the accumulated rate of inflation. Although, such a measure is reflective of overall annual economic growth. Despite the fact production has become more efficient, we still experience an increase in nominal prices year over year. The concern is expressed in George Selgin’s monograph Less Than Zero (1997).

Overall, very few people benefit from the inflationary monetary policy enabled by fiat currency. The concerns regarding liquidity and deflation under a gold standard may have some validity. These concerns are not pressing enough to justify a fiat standard. Inflation reduces the incentives to save money, making it an opportunity cost to holding U.S. Dollars in your savings account. At least investing your money in stock, bonds, real estate, or even cryptocurrencies has the potential of positive return. Whereas Dollars only stand to decrease in value. Various talking heads posturing as financial gurus (Dave Ramsey) tell you to save, save, save! Given the current state of modern monetary policy, there is little incentive to do so. Countries such as Japan have implemented negative interest rate policies eviscerating any incentives to save. Under such conditions, even frivolously sinking money into consumer goods and entertainment may serve as a strategy to hedge against inflation.

The core arguments for why we should return to a gold standard include: avoiding inflation, Cantillon Effects, and more stability. The concern of inflation is self-evident, along with Cantillon Effects acting as an abstract form of regressive taxation. The last argument may seem counterintuitive because there is a well-perpetuated myth about the volatility in the value of gold. In the absence of hard constraints, monetary institutions can keep producing money with impunity leading to hyperinflation. Also, if gold is unstable, would Alan Greenspan even attempt to emulate such a standard while heading the Federal Reserve? Unfortunately, his fidelity to this endeavor is questionable.