Friday, December 3, 2010

An Essay on Sound Monetary Policy

This will be a short essay, appropriate to the topic at hand.  It consists of a quote from Milton Friedman, found in Joseph Salerno's outstanding book, Money, Sound and Unsound, p. 366:
If a domestic money consists of a commodity, [such as] a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself.  [emphasis added]
Imagine that.  If we have sound money we don't need the Fed.  Or Congress.  We just need sound money.

End of essay.

Postscript:

Economist Nouriel Roubini recently attacked the gold standard.
Roubini raises the following question: If you are on a gold standard, or modified gold standard, what do you do in the event of a bank run—if you don't have enough gold to fully back the currency?
Translated: What happens if the banks have created bogus IOUs for their depositors' gold?  Suggestion: Have them indicted as embezzlers.  Gold doesn't "back" anything.  It is the money.  The banks issue  IOUs for the money.  When they issue more IOUs than they have gold on hand, they're cheating.

Roubini also says that a "gold standard limits the flexibility and range of actions that central banks can take."  That alone should recommend it.  He thinks it's a shortcoming.

A gold standard doesn't need Roubini.  It doesn't need Bernanke.  It doesn't need Congress.  It doesn't need the World Bank or the International Monetary Fund.  It just needs to be left alone.

The gold standard "requires nothing else than that the government abstain from deliberately sabotaging it," Ludwig von Mises wrote in The Theory of Money and Credit:
What all the enemies of the gold standard spurn as its main vice is precisely the same thing that in the eyes of the advocates of the gold standard is its main virtue, namely its incompatibility with a policy of credit expansion.  The nucleus of all the effusions of the anti-gold authors and politicians is the expansionist fallacy. (p. 421)
Credit expansion - inflation - is indispensable to a growing government. Which is why every government hates the gold standard - especially an autonomous, market-controlled gold standard.  From Human Action:
The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper. (pp. 471-472)
If wealth could be created out of scraps of paper, world poverty would be a thing of the past.

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