Misconceptions of the Gold Standard

An entry on the Huffington Post regarding Ron Paul and the gold standard makes clear that the author has very little understanding about what a gold standard means or the constitutionality thereof. I hope this post will clarify things.

Journalist Andrew Reinbach’s piece titled “Giving Ron Paul the Media Attention He Deserves” is a fact-free article which spouts many points constantly used to attack the idea of sound money. He makes four arguments: Ron Paul is supported by the John Birch Society therefore he is a bad person, the Constitution does not allow for competing currencies, there isn’t enough gold to revert to a gold standard, and Ron Paul has a conflict of interest with respect to gold.

On the first point, that the John Birch Society has endorsed Ron Paul, so what? Did Reinbach make similar complaints about Jeremiah Wright’s endorsement of Barack Obama? Heaven forbid that an organization that Ron Paul has spoken in front of numerous times would endorse him.

Secondly, his assertion that competing currencies is unconstitutional is a dog that doesn’t hunt. Article I, Section 8 of the Constitution enumerates the powers that the Congress has. This list, while meant to be exhaustive, doesn’t prohibit others from doing many of these things. Section 10 is the provision which prohibits States from doing certain things, but no where in the Constitution is private coinage prohibited.

The best example of this notion of enumerated powers is the Post Office. The Congress has given monopoly power over first-class mail to the United States Postal Service, an organization whose financial troubles are so dire that they would actually consider slowing down mail service to save money. This inefficient organization, while given a monopoly by Congress based on power in Article I, Section 8, is not implied to have monopoly power in the Constitution. As abolitionist and entrepreneur Lysander Spooner noted in 1844, this power does not prevent other people from establishing postal service. And so Spooner created a private mail company, The American Letter Mail Company, to directly compete against the monopolistic United States Postal Service, which at the time was charging anywhere from 14.5¢ to 25¢ for a one page letter (in comparison, first-class mail stamps today cost 44¢) and was seen by many as corrupt. Spooner’s company was created to challenge both the high prices and constitutionality of the mail service. He announced a new postal service which would mail letters for 6¢, and this quickly drew the ire of the Congress and Postal Service. Court battles ensued, in which Spooner was victorious, but Spooner’s ultimate victory was actually in the end of his company: he forced the Congress to reduce postal rates which put him out of business.

Today, we think nothing of shipping packages and letters through alternative carriers such as FedEx and UPS or sending email. Both of these methods are efficient and cost-effective for users, yet they do run afoul of Reinbach’s assertion that a power enumerated by the Constitution gives the federal government the exclusive monopoly over it.

Returning to the topic of money, it wasn’t until 1862 that there was a single US dollar. Through nearly the first century of the United States, banks issued competing banknotes backed by specie (physical gold and silver) and state government bonds. In 1862, as the Union was having a hard time getting American banks to become nationally chartered under the National Banking Act, it created the Legal Tender Act which created a tax on non-nationally issued banknotes. This tax made it easier for the Union to float debt in order to pay for the expensive and bloody Civil War. This new monetary system adopted by the US government led to massive price increases throughout the North (although the South suffered much worse inflation due to their currency schemes).

One final point to mention with respect to competing currencies is that the government is so scared of private competing currencies that those who dare challenge the government’s monopoly on issuing currency are deemed “terrorists.” I wonder if Spooner would have been arrested for terrorism if he were alive today? The notion that the government needs to have exclusive power over coining money goes back to the age of the Romans, when emperors routinely debased currencies in order to pay for the expansion of the empire. Today, debasement of the currency is euphemistically called quantitative easing and cheered by the court economists and hagiographs in the media, despite the fact that it is still possibly punishable by death to debase currency.

It’s clear in plain language and with historic precedent that competing currencies are constitutional. Reinbach’s second point regarding the unconstitutionality of competing currencies is thus demonstrably false.

But what to make of Reinbach’s attack on the return to the gold standard? This is where the facts hit the road and nonsense takes their place.

We can assume that when he says we should return to the gold standard–abandoned in 1971 by Richard Nixon–he means every US Dollar would be redeemable for $1 in gold; otherwise, only part of every dollar would be backed by gold, and the whole idea of a gold standard becomes mere symbolism.

As I noted in an earlier post, the gold standard has never meant dollar parity with gold. A gold standard is a system where the monetary unit is a fixed weight of gold. In other words, it’s simply a definition. A gold standard means the monetary unit becomes a unit of measure of that commodity, in the same way that an ounce is a unit of measure in terms of pounds. Declaring that only part of every dollar being backed by gold would be merely symbolism shows complete ignorance about what a gold standard is understood to be by economists.

The gold standard abandoned by Nixon wasn’t a true gold standard per se, but rather a gold exchange standard which meant that only foreign central banks could convert dollars into gold or vice versa. The Bretton Woods treaty abandoned by Richard Nixon in 1971 stipulated that every dollar was worth 1/35 ounce of gold, or in other words gold was worth $35 per ounce. This gold exchange standard was abandoned due to the American government creating more dollars than it had gold in order to pay for its massive welfare and warfare state.

Neither did the classical gold standard mean dollar parity with gold. The classical gold standard, in use before 1914 when the Federal Reserve came into operation, meant that every dollar was worth 1/20 ounce of gold, or that gold was $20 per ounce. The classical gold standard was formally abandoned in 1933 when FDR confiscated privately held gold, made it illegal for US citizens to own gold, and debased the dollar from $20/ounce to $35/ounce. This ratio existed until 1971 (more or less, read the about the complications here).

Reinbach is absolutely correct that the amount of gold in existence would be prohibitive to returning to a gold standard at parity. But that’s a strawman; that’s never been what a gold standard entails. He’s being deliberately deceptive on this point, and I hope Huffington Post readers realize this. Judging from the comments, some do.

Murray Rothbard shows in The Mystery of Banking that one way to return to a gold standard would be to define the dollar in terms of current dollars in circulation in a fixed ratio to government gold holdings. Based on Reinbach’s research that the US government owns 8,133 metric tonnes of gold and the current M1 money supply of $2085.8 billion, Rothbard would say one ounce of gold should be worth $7,271 in a 100% reserve system.

But that’s just one way of examining the problem of returning to a gold standard. The main point is that Reinbach doesn’t know what a gold standard is to begin with, so he probably should refrain from making arguments against returning to one.

Finally, his fourth point with respect to Ron Paul’s supposed financial conflict of interest, is a non sequitur. His position on the gold standard has been consistent since Richard Nixon first ended the Bretton Woods treaty in 1971 (which, incidentally is why he became interested in economics and politics to begin with). His advocacy for sound money has been unwavering in those years, and contrary to Reinbach’s assertion that he is trying to return to a gold standard for personal gain, he’s been railing against unsound money in order to ensure financial stability for America. In 2002, Ron Paul was the sole voice in Congress sounding the alarm against monetary debasement and government incentives which led to the housing bubble which has left the entire world in a state of financial disarray. Simply, Ron Paul believes that the country needs sound money, and he has put his money where his mouth is.

I’d also like to hear Reinbach’s critiques of other conflicts of interest in Congress. Congressman Mel Watt (D – NC), who practically works for Bank of America, gutted the bill to audit the Federal Reserve’s monetary dealings with banking institutions. Senator Dianne Feinstein (D – CA), whose husband has ownership in at least two defense contractors, voted to go to war against Iraq and was an original cosponsor for the PATRIOT Act. Or Governor Rick Perry’s campaign contributions from Merck before he acquiesced to the advice of his former chief of staff turned lobbyist to mandate that all girls in Texas get the controversial Gardasil vaccine.

These examples were just the first to come to my head, and I’m sure we could think of more. It’s clear that there are many conflicts of interest in government, but somehow a man who has an honest belief that people shouldn’t be robbed by the monetary system of the United States is odious in nature. Reinbach is clearly being disingenuous with his allegations.

Andrew Reinbach’s attack on Ron Paul displays no integrity with respect to positions held by Paul. Reinbach has established himself to have no credibility on any topic on which he commented on in his article. A return to sound money is not what he asserts it to be.

Rick Santorum’s Problem with Cause and Effect (Updated)

One thing we know with certainty is that when man acts, it has an effect on the world around him. Man acts because he believes it will change something, and it does. Action involves using a means toward an end. It is understood that this action then changes not only the man but the world around him. Man understands that his actions will have effects not only on himself but possibly on the world around him. This is the basis of cause and effect.

This very basic concept of cause and effect escapes Rick Santorum, a former Senator from Pennsylvania currently trying to be the Republican nominee for the President of the United States. One of the constant refrains from Santorum is to criticize the foreign policy stance of a fellow Republican, Congressman Ron Paul. From a recent statement:

Congressman Paul needs to realize that they hate us not for what we do, but for who we are.

As the article mentions, Dr. Paul mentioned American invasions of Saudi Arabia, the birthplace of Islam, as a motivation for terrorists to attack America on 9/11/2001. America’s occupation of Saudi Arabia was only one of many complaints terrorists had against America. The occupation of Saudi Arabia wasn’t the only motivation for attacking America, according to Osama bin Laden. In 1998 he issued a fatwa against America in which he railed against not only stationing American troops in Saudi Arabia, but American support for Israel and the deaths of thousands of Muslims at American hands as well.

Throughout the 1990s, the United States enforced a no-fly zone and sanctions over Iraq which killed more than 500,000 Iraqi children. The US, in support of its mission to prevent Saddam Hussein from getting “weapons of mass destruction,” bombed Iraq on average every three days. Sanctions prevented Iraq from getting food (which it imported in great quantities) and other vital resources meaning Iraqis didn’t even have safe water to drink.

American officials were unapologetic for what was going on in Iraq during this time:

In this context, it is easy to see why some might be upset over American intervention in the Middle East. The resentment isn’t limited to al Qaeda and the so-called “Islamic extremists.” In 2008, Ron Paul mentioned in a presidential debate that a CIA operation in Iran overthrew a democratically elected President, Mohammed Mossadegh, for the benefit of the Anglo-Iranian Oil company (now known as BP). This sovereign government was replaced by an American puppet, Shah Mohammad Reza Pahlavi, who ruled with an iron fist. His secret police were trained by the CIA in methods of torture. In 1979, the Shah’s regime was overthrown which led to the imprisonment of American embassy workers. The United States subsequently supplied Saddam Hussein (president of Iraq) with weapons with which to fight Iran in the Iran-Iraq war, leading to millions of casualties. To this day, American politicians continue to beat the war drums against Iran under false pretenses.

This isn’t to say that American intervention is the only intervention which leads to this so-called “blowback.” Robert Pape, a professor of political science at the University of Chicago, has constructed a database of thousands of suicide bombers since 1980. He has found that nearly every single suicide terrorist bombing has been not because of religious or ideological motivation but because of foreign military occupation.

The idea that Americans are hated simply because of “who we are” ignores the fact that American foreign intervention routinely leads to negative unintended consequences which may effect people negatively. Christopher Coyne, an economist at George Mason University, studied places where America has intervened. Using the current polity score of Iran, a measure of political and economic freedom, he looked at the effects of American intervention. He found that in nearly two-thirds of the countries where America has intervened in the past century, there hasn’t even been an improvement even to the poor level of Iranian government. Countries like Cuba, Haiti, and Afghanistan are examples of failed American intervention, and in many cases (such as Cuba and Afghanistan) there is measured anti-American sentiment.

9/11 wasn’t an isolated incident in terms of blowback in the modern War on Terror era. After all, it isn’t just a coincidence that Faizal Shazad, the Times Square bomber, came back from his native country Pakistan where the US is continuing a drone bombing campaign killing an inordinate amount of civilians without knowing for certain who it is killing. Nor is it a coincidence that al Qaeda in Yemen sent bombs through the mail or sponsored the underwear bomber after the US dropped cluster bombs on the country and lied about it.

Cause and effect is a constant in a world where man acts. Yet for someone like Rick Santorum it is vital to ignore history and causality in order to score political support for points not based in reality. It’s no wonder that his donations from service members is next-to-nothing, while the man he says is “shockingly misguided” has nearly 150 times the support from those in the military. Maybe this is due to Santorum’s inability to reconcile cause and effect.

Update: Rick Santorum continued to parrot the same nonsense at the Tea Party Debate on 9/12.

Bachmania

Last weekend’s Ames Straw Poll gave Minnesota Congresswoman Michele Bachmann credibility among the mainstream media that she is a serious candidate for the White House next year. Immediately following the Straw Poll, Bachmann was on all five Sunday morning talk shows to discuss her presidency. She’s been called a Tea Party favorite. However, her rhetoric is generally not being put under scrutiny.

In a speech last fall, she spoke of Iran as a Very Serious Nuclear Threat and also gives support to the People’s Mujahideen of Iran, also known as the Mujahideen e Khalq.

Please watch:

Her first point, that Iran is a nuclear threat, is completely false. During the August 11th GOP presidential debate it was assumed as given by all presidential candidates (save Ron Paul) that Iran is a nuclear threat. Yet this claim does not hold up to scrutiny, as Scott Horton pointed out last year. The International Atomic Energy Agency continues to verify that the Iranians are not diverting nuclear materials from peaceful purposes. Despite recent attempts to change the National Intelligence Estimate, there is still no evidence that Iran is developing a nuclear weapon. In other words, the idea that America needs to be fearful of a nuclear-armed Iran is without merit.

Her second point, that America should de-list the Mujahideen e Khalq (MEK) from the list of Foreign Terrorist Organizations, is also suspect. To begin, MEK has been spending big money trying to change the opinion of American politicians on its checkered history. The group, which has been described as a Stalinist cult, has a past of killing Americans and working for the Saddam Hussein regime in Iraq. Supporting MEK would be a horrible move for America, and Bachmann’s support for that organization must be questioned.

But considering that she openly supports a terrorist organization which has a past of targeting and killing Americans, it’s odd that she also supported the reauthorization of the PATRIOT Act as a “Tea Party” Republican. Her support of the MEK shows a disconnect that is often found in American foreign policy, similar to the American support for the Afghan mujahideen against the Soviet Union, where Americans support people whose objectives are suspect for short-term gain only for those “gains” to be reversed in the future as those supported become the new enemy.

Of course it isn’t enough for Bachmann to support a terrorist cult, but she actually has to create fake enemies for the United States while ignoring the threats she supports creating. This past week Bachmann claimed that the US needs to be afraid of a resurgent Soviet Union.

Her support of the PATRIOT Act and lip service to war propaganda aren’t the only questionable aspect of her Tea Party credentials. She spent several years working for the IRS as a tax litigator. Apparently God, through her husband, told her to become a tax attorney. I’m no theologian, but this support for the state seems highly suspect. Bachmann has more recently claimed that she wanted to defeat the IRS by working for them and getting to know the system, however coworkers claim she didn’t work much at all while at the IRS due to inexperience as well as spending a good portion of her time on maternity leave.

Michele Bachmann’s sincerity as a conservative is just as questionable as Rick Perry’s. She has demonstrated herself as a war propagandist and terrorist sympathizer while pretending to be a “Tea Party” small government Republican. Her record needs to be scrutinized far more harshly than it currently is now.

Questioning

I noticed in the entry about my encounter with Rick Perry by Will Wilkinson at the Economist that some people don’t take too kindly to questioning politicians. I saw the same in the comments for the YouTube video. One guy on the Internet compared me to Joe the Plumber and said that “ambushing politicians is pathetic.”

I have two things to say about this. One, as Rick Perry’s record suggests he is representative of the mainstream party system, and the problem is his record is not being questioned by the media. He needs to be taken to task at every opportunity about spending increases, reckless debt, and pandering to corporate interests because these are the issues the Republicans and Tea Party are hammering. Corruption and irresponsibility are on the radar, and Rick Perry is the poster child of these ills.

After the Ames straw poll, the media has created a narrative which specifically excludes Ron Paul to favor a race among three establishment-friendly candidates. While this exclusion is being addressed now, the media isn’t seriously questioning Perry’s record as a big government Republican in the vein of George W Bush.

Two, the larger issue isn’t Perry, per se, but the fact that people are against “ambushing” politicians with tough questions about their records, to the detriment of information in America. The mainstream media plays the role of gatekeeper in this system, and their unwillingness to question those in office or attempting to run for office has led to the state we are in today. Don’t believe me? Read about the Vice President’s beach party attended by the Very Serious Washington Press Corps last summer. They yuck it up and enjoy being around their sources, then turn around and give us the same Red Team vs Blue Team nonsense.

An Obituary for Bretton Woods

Forty years ago this week, President Richard Nixon ended the Bretton Woods gold exchange standard.  This system was designed after World War II as a means to create monetary stability. Notice how Richard Nixon describes what happened, that the “speculators” forced the US to leave the gold standard, that prices wouldn’t be affected, and measures would be taken to ensure stability.

The use of the word “speculator” was pure political rhetoric. The Bretton Woods treaty created a fixed exchange standard, where countries could exchange their local moneys for a fixed rate of dollars, and in turn the dollar was convertible into 1/35 ounce of gold. The problem with this fixed exchange rate is that it gave the US the ability to run deficits and create money without respecting the terms of the treaty. French economist Jacques Rueff noted in his 1972 book The Monetary Sin of the West that this treaty allowed the US to run deficits “without tears.” The US abused its power as the reserve currency under this treaty. As noted by economist Joseph Salerno, this table shows US gold holdings and liabilities under Bretton Woods Treaty:

As seen in this table, the US abused its ability to deficit spend and push inflation off onto other countries. The deficits caused by President Johnson’s Great Society programs and the Vietnam War by 1968 were draining the US balance of payments.

In March 1968, the situation reached critical mass. Rather than outright default, the US created a two-tier gold market, where it would only sell gold to central banks at $35 and the private market was allowed to float. The US also temporarily suspended payment of gold.

Johnson tried to balance the massive budget deficit without making major cuts. Social Security was placed “on-budget” and all tax revenue from payroll taxes was placed into the Treasury general fund. Current expenditures for Social Security were paid out, and any surplus would be spent by the Treasury to hide current deficits, and bonds would be issued to the Social Security Trust Fund to be redeemed later when needed (as it turns out, this accounting trick is still used today, and was most famously responsible for the myth of a budget surplus during the Clinton administration). Fannie Mae, the government originator of housing loans, was “privatized” as well.

This didn’t work to quell the international markets. With the US still running massive deficits, foreigners got worried and started to try and sell dollars for gold. This is what forced Nixon to finally cut ties to gold in 1971 and create price and wage controls, leading to stagflation for an entire decade. Robert Auerbach writes in Deception and Abuse at the Fed that in order to alleviate economic troubles in 1971 and ensure reelection, Richard Nixon asked Federal Reserve Chairman Arthur Burns to lower interest rates and create a boom economy. The short term boom was followed by years of economic stagnation which were only ended as Paul Volcker became the Fed Chairman and halted money supply growth.

The end of Bretton Woods had many repercussions beyond economic stagnation and inflation. As David Spiro writes in The Hidden Hand of American Hegemony, the Saudis and other oil rich countries were trying to get out of dollars because they were no longer tied to gold. In order to prevent this, the US secretly gave the Saudis discounts on Treasury Note purchases in order to keep oil tied to dollars.

I’ve only scratched the surface of this topic, because it was certainly a fascinating time. Since 1971, the dollar has lost 82% of its value. The US has become an importing nation (which isn’t necessarily a bad thing, though). Inflation has led to more people having to work for less (although thanks to the market people can improve their lives more cheaply). The end of the gold exchange standard in 1971 led to the explosive rise of the financial sector as increasing numbers of government bonds were used as instruments for arbitrage by investment banks.

Rick Perry Afraid of Rick Perry (Update)

I had the chance to meet Governor Rick Perry at his campaign stop in Iowa City yesterday. It was at the famed Hamburg Inn #2, where many candidates come for meet and greets before elections. The room was packed. The place has seating for about 75 people, and it was a full house. Standing room only. There was media everywhere; one of Wolf Blitzer’s field correspondents had her Situation Room camera right in front of my table.

Around 3:30, Perry arrived and shook hands all the way around the restaurant. While I was waiting for him to come around, met Mrs. Anita Perry and the family. Mrs. Perry asked me what “Mises” was all about on my wristband and proceded to talk about whatever nonprofit was on hers.

About five minutes later, Governor Perry came around and I talked with him briefly about his record. Here’s part of the exchange:

What I asked Governor Perry was “Considering state debt has nearly tripled and spending has increased by two thirds since you were governor, and also that ACORN considered your help their ‘proudest moment,’ what were the differences between him and the current liberal president?” As you can see, he immediately tried to excuse away the numbers.

I found the debt numbers at Politifact from Bill White, who quotes the Texas Bond Review Board. I asked Perry about the raw numbers, which show that in 2000 Texas state debt was $13.7B, and by 2009 that number had grown to over $34B (Mitchell Schnurman found more recent numbers for 2010: $37B.). Bill White at Politifact adjusted for inflation and found the debt merely doubled under Perry.

Perry’s record on spending can be found at Texas Budget Source. In 2000 when Perry took over, Texas spending was $49.7B and the latest numbers the site has available show that spending was $82.1B, a 67% increase. Adjusting for inflation and population growth, the growth in the size of the Texas government during his time as governor is a paltry 36%.

Finally, I found that Perry had good friends in ACORN, a community organization that Republicans love to hate. In 2006, Perry signed into law a bill which benefited low-income homeowners. ACORN called this their “proudest moment.” When Senator Kay Bailey Hutchinson opposed funding ACORN in 2007, he attacked her.

This brings me full circle back to my question, what are the differences between him and the current liberal president? The Republicans love to attack President Obama for being a tax and spend liberal, being friends with all sorts of liberal organizations, and so on. Governor Perry’s record shows that he isn’t much different than President Obama, and he didn’t want to comment on this. His campaign website spouts platitudes about a record of cutting spending, which don’t jive with the numbers.

But that’s not all.

Governor Perry was once a Democrat. Not that there’s anything wrong with that, but during Al Gore’s 1988 presidential bid, Perry was Al Gore’s Texas state chairman. For him to be so admired as a solid fiscal conservative means that people are completely oblivious to his record.

One other thing to mention is that Perry has a bit of a problem with handing out special favors to corporate interests. Many people are aware of Rick Perry’s executive order mandating that all 11 and 12 year old schoolgirls be given the controversial Gardasil vaccine, but many are unaware that Merck (the corporation manufacturing the drug) gave Perry money during his reelection campaign or that Perry’s former chief of staff went to work as a lobbyist for Merck before Perry issued his order.

I like the idea of private roads, but Perry has made sure to give the idea a bad name. In 2002, Perry promised to build a network of private toll roads called the “Trans-Texas Corridor.” However, he wasn’t too interested in maintaining property rights for Texans, and in a post-Kelo world, we ought to be concerned with this. In 2007, Perry vetoed a bill which would have given protection to property owners in eminent domain disputes.

Governor Perry has also been responsible for handing out huge sums of money to other political donors. Perry created a large taxpayer slush fund in 2005 with which to hand out money to promising political donors. Not only does this sort of corruption sound horrible, but it was destined to never work.

The shaking of hands with Governor Perry went just as expected. He has a record of excessive spending and working with lobbyists against the people of Texas. When confronted with his own record, Rick Perry runs. He’s no different than either George Bush or Barack Obama. In fact, before he arrived our table was discussing how Rick Perry looks just like Josh Brolin in that movie about George W Bush. His record and positions will not be questioned, and he will continue to have the adulation of the huddled masses, and he’ll wave his way into the White House:

Update: Rick Perry has been making remarks lately about how much he dislikes the Federal Reserve. Funny he should mention that considering his fervent support for bank bailouts in 2008.

Also, Robert Wenzel’s Economic Policy Journal and Will Wilkinson have linked to this entry and given some additional feedback. Wilkinson, whose footage you see above, wrote about a blog retweeted by Sarah Palin showing she has a better record on state debt than Perry.