The Gold Standard

It’s atavistic.  Then again, so is Aristotle.

Durability.  Portability.  Divisibility.  Intrinsic value.  Everyone knows these, even the guys at “Market Oracle”:  it’s all Aristotle.  People get hung up on the “intrinsic value” thing.  So what.  It’s not that important either way.

Politics.  Ethics.  Economics.  Biology.  Tutor to Alexander the Great?  That Aristotle certainly got around.

I generally prefer Plato to Aristotle, but sometimes you have to deviate from your usual preferences because, well, it’s the right thing to do.  Look at this.  (Who the heck is Joan Bardina, anyway?  Does this discussion have something to do with Basque separatism, a phrase that appears here and there in media reports over the last few decades?  Let’s not go there.  At least not right now.)

Let me just say that sometimes these posts won’t make much sense if you don’t use the links.  Proceeding on, then…

Steve Keen is a smart guy and he likes to use charts and graphs, and there’s nothing wrong with using charts and graphs but when you start invading Aristotle’s territory you should remember that he didn’t use charts and graphs, and just maybe he was a smart guy, too, and if he didn’t use charts and graphs maybe they’re unnecessary or even counterproductive, otherwise that smart guy Aristotle would have used them because you can be sure charts and graphs were around back then and he would have – but since he didn’t I’m not going to, either.

Sorry for the run-on sentence but I think it’s effective, don’t you?  I mean, if I’m not going to put in a pretty chart or graph I need to try something else to hold a reader’s attention and that’s one way.

But here’s the thing.  What, exactly, is the “gold standard”?  It’s a seemingly innocuous thing, a mere convenience, a shorthand.  If you have some monetary unit of account – dollar, drachma, ducat, talent, whatever – that unit is defined as a quantity of gold.  Sometimes another precious metal like silver has been used, but the bottom line is this kind of thing has a long history.

In other words, the “gold standard” is just a definition in the law, that’s all.  It tells you what a “dollar” is.

Why would we do that – why have we done it?  I’ll tell you.  It’s not rocket science:  it’s divisibility, which is necessary for money according to Aristotle yet also poses a problem.  Gold is infinitely divisible into smaller and smaller amounts.  You’d never get to the bottom of it.  Distinctions in pricing would become so minute that rather than facilitating trade, gold would stifle it as the market place choked on disputes over finer and finer divisions of it in the pricing of goods and services.

So we use a shorthand for quantities of the stuff to make the division manageable enough for use in trade.  We don’t say:  this suit costs 1.00000002 ounces of gold, but I can get a real bargain across the street on a suit for 1.00000001 ounces.  That gets ridiculous.  So, we limit the divisions to “dollars” and 100 equal subdivisions of that, called cents appropriately enough.  We do it by convention first and then by law.  But all the law does is codify the convention.  The convention is natural and organic, like granola.  It just arises out of the way people deal with one another.  It is neutral.  It applies to everyone equally.  By codifying it into law, the government has done everyone a very important public service, in the true sense of that term:  it helps everyone and favors no one.

People then trade using the convention, and all is well.

I’m just kidding.  All is not necessarily well.  We might still have Jersey Shore on TV.

The point is, adopting the convention by law creates other issues.  For example, someone might give you a “dollar”, for your product or service, but he’s corrupted the coin with zinc or something.  You think it’s a dollar but it isn’t.  You’ve been cheated.

Yet, does it matter that much that the coin is part zinc?  I mean, what’s the big deal?  I’ll tell you what the big deal is.  You see how important the convention is?  It is also fragile.  If it’s challenged people have to understand the whys and the wherefores of it or the challenger will succeed in abolishing it.

And the only guy that understood it was Aristotle.  And he’s dead.

So the worst thing, the absolutely worst possible thing from the standpoint of trade and facilitating trade and commerce, which is the very stuff of civilized life – and if you don’t believe me hop the very next plane to Tunisia and see what’s going on over there – the very mostest worst possible thing is for people to cheat on the delicately balanced but legally binding convention, because it threatens the very economic basis of social interaction, which is trade and commerce, which leads to all kinds of other wonderful things.  Like cities.  And opera.  And art.  And pornography.  And lawyers.

Wait.  I didn’t mean it about pornography.  And I sneaked “lawyers” in there hoping no one would notice.  I love lawyers.  And I am lonely, as you might imagine.

Now, as you can see above Steve Keen referred me to one of his brilliant posts entitled “Roving Cavaliers of Credit”, saying that he dealt with his opposition to the gold standard there.  But I didn’t see much about the gold standard in that post.  It was mainly about “credit money” vs. “fiat money” and how we live in a “credit money” world, and there are charts and graphs but he never uses any US data from, say, 1836 to 1913 when the US had a functioning gold standard.  And I agree with him as far as it goes but we’re talking past each other and although I’m not big on the whole “blame” thing I’m going to blame him, at least for that.

I’m willing to entertain objections to a gold standard but I think it has to be understood for the relatively mild and historically validated convention that it is.  And it’s odd that there are such strong opinions about it, because once you understand it you see that the nature of it is to be pretty much non-controversial.  Having strong opinions about the gold standard is like having strong opinions about what a foot or a yard or a quart or a gallon is.

But then, I think there is something more underlying opposition to the gold standard.

Next post.