Monday, May 9, 2011

David Stockman Provides Six Reasons Why The Gold Standard Beats Fiat

In a talk delivered to the New York Historical Society on May 8, 2011, David Stockman says that the gold standard isn't a perfect system but it beats fiat hands-down. His six reasons why, are:
  1. The gold standard would have prevented the U.S. current account deficit from getting out of hand over the last forty years. There were no chronic trade deficits when the gold standard was in operation.
  2. Because the gold standard does not allow the creation of imaginary capital, it keeps debt levels from bloating up. Total (public-sector and private-sector) debt was 1.6 times GDP under the gold standard; it's now more than double that ratio.
  3. The gold standard takes away the 'flexibility' that permits moral hazard to grow and Wall Street bailouts to be effected. Back in the gold standard days, financiers had to be less imprudent than they are now.
  4. The gold standard kept fractional-reserve banking from imploding by limiting leverage. Under fiat money, the only limits are statutory and judgmental. These, 'flexibility' tends to erode.
  5. The gold standard provided negative reinforcement when chronic budget deficits were resorted to. With fiat money, even perpetual deficits can be monetized by the fiat-issung central bank.
  6. The gold standard also moderated business cycles. Look at how volatile U.S. inflation and economy have been since the United States went to full fiat in 1971.

The last point deserves a little emphasis. As we now know, fiat money does not provide immunity to new Great Depressions. If it did, then why all the panic in the official sector in the crisis of '08? Why Japan's continued troubles?

A lot of the criticism of the gold standard amounts to it not being perfect, not matching up to a hypothetical standard. That worked when fiat money was new. But now, fiat has a 40-year track record. We now have to periods that can be compared, and the fiat-money period does seem wanting.

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