Neocon Economics - David Frum One Year Later

Thought I would repost this Neocon critique of competing currencies (which they continue to label "Gold Standard"). I'm reminded of the sypathy prize that goes to the kid who pins the tail farthest away from the donkey. Enjoy a good laugh. This is from Nov. 7, 2007:

Who Supports Ron Paul?

Yesterday, I posted an item casting doubts on the significance of Ron Paul's one-day $4 million fundraising haul. I suggested that his achievement is comparable to Ralph Nader's in 2000, and much less impressive than Howard Dean's in 2004. I went on to suggest that the main effect of Ron Paul's campaign, if continued to the end, would be to take votes from Hillary Clinton and thus help a Republican ticket headed by Rudy Giuliani.

Byron York tells me that any comment about Ron Paul generates unusual amounts of email, and so it proved here. I find that a typical blogpost elicits anywhere from 5 to 8 personal emails. (The bookshelf entries, interestingly, generate many more, typically 20—30.)

My Ron Paul entry provoked 18, more than double the usual. I broke the entries into four broad categories, which may tell us something about the character of the Ron Paul voting base:

Critical but civil: 7.

Extreme and abusive: 5

Outright paranoid: 5

(EG: "When Ron Paul finally wins to clean up the dire mess we are in, I hope you finally learn that you were trying to help build a terrorist government and a prison planet.")

Explicitly anti-semitic: 1.

It's long been my policy to reply (not always promptly, but sooner or later) to every civil email I get, both positive and negative. Clearly the Ron Paul inbox will not unduly tax this policy.

And since most of the civil emails make the same point, I will further reduce the workload by responding collectively here. My correspondents were most irked by my sardonic suggestion that Ron Paul could enhance his electoral appeal by concentrating his blame-America foreign policy (for which as Michael Moore showed, there exists an unfortunately substantial constituency) and dropping his crank monetary views.

My emailers answer that the crank monetary policy is a) not cranky and b) potentially hugely popular.

As to b) I can only say: They should get out more.

As to the merits of a) let me essay a short answer.

Right now, the United States is in the midst of a huge rebalancing of its external accounts. A big current-account deficit has begun the inevitable and ineluctable shift to a correspondingly big current-account surplus. The mechanism by which this will occur is a decline in the trade-weighted value of the US dollar. As the dollar buys less abroad, Americans will be constrained to consume fewer foreign goods and services - and foreigners will be induced to buy more from Americans.

With luck, this process will occur without a recession. The pace of domestic economic activity will continue brisk, dollar-denominated incomes will remain stable or even rise, unemployment may even decline as exports accelerate. This is what happened in 1985-86, the last time we saw a big drop in the value of the dollar.

All holders of dollar assets lose some of their wealth - but the burden falls most heavily on those with the most wealth to lose, who also happen to be the people who enjoyed the biggest gains during the previous increase in the value of the dollar. The burden falls least heavily on those with nothing to sell but their labor. This approach is not only equitable, but also surprisingly painless. Since permanently abandoning gold convertibility in 1933, the US economy has experienced far less economic volatility. Recessions are fewer and shallower (if sometimes longer).

Of course, that's not the only way to balance accounts. There is another, the way Americans experienced in 1837, 1857, 1893, and 1930-33. In those years, the value of the dollar was fixed to gold. (One dollar = 1/20 of an ounce.) If something bad happened in the world or US economy, the dollar could not adjust. A recession was like a car accident without bumpers or crumple zones - the full pain was conveyed uncushioned to the riders in the cabin. Domestic asset values collapsed. Unemployment jumped overnight to 15% or 20%. Homes were lost, businesses disappeared.

That's why the 19th century was the golden age (if I may be excused the expression) of monetary cranks. From the Greenback party of the 1870s to the William Jennings Bryan crusade in 1896 for free, unlimited coinage of silver (meaning, under the circumstances of the time, a deliberate policy of inflation), Americans rebelled again and again against the gold standard's habit of hurling America off the economic cliff once in every generation.

In 1896, ironically, the gold standard got lucky. Bryan lost, McKinley won. Almost immediately after McKinley's elections, gold miners first in South Africa and then in Australia found huge new goldfields. America got the inflation it needed without silver, thanks to a geological accident. From 1896 to 1913, the world economy expanded in what is known to history as "La Belle Epoque." Because that expansion was immediately followed by the catastrophe of World War I, it shines even happier than it really was. (There are doubts for example how rapidly the personal incomes of ordinary people really rose over those two decades.) And that happy interval casts an undeserved retrospective glow on America's experience with gold.

What the gold standard really is, fundamentally, is a rule that the nation's monetary stock should be determined, not by central bankers, but by miners. Why that should be regarded as an improvement by anyone, I cannot understand.

Let me add one final note. Even to treat the gold standard as a live option is to utterly misunderstand modern finance. It can never be restored, even if anyone were foolish enough to try, for a reason brilliantly explained by John Maynard Keynes almost nine decades ago:

The gold standard was ultimately sustained by a near universal belief that gold was money - and that nothing else was. There's a story told about the socialist minister in the British Labour government of 1929-31, who was stunned when his more conservative successors took Britain off gold in 1931. "They never told us we could do that!"

Well, now we all know that "they can do that."

Suppose that the US were on the gold standard right now. Suppose the country headed to recession. We would all know that the president and Congress of the moment could mitigate the recession by going off gold. We, each of us, would have to anticipate that possibility in our financial planning. So what would we do? We'd trade our "gold" dollars for commodity gold, and we'd hoard that - thus transforming a looming recession into an instant financial panic.

And since the government of the moment would have to anticipate that reaction, it would have to move even faster, dumping gold at the first tremor of bad news.

So you and I would have to act even faster still, never accepting "gold" dollars in the first place ....

Which is why the whole thing is so irrecoverably dead.