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Killing the golden goose that lays the golden egg

Commodities / Gold and Silver 2012 Apr 06, 2012 - 12:23 PM GMT

By: Jan_Skoyles

Commodities

Best Financial Markets Analysis ArticleIn the first quarter of 2012 we have seen a few high profile criticisms of the gold standard. Reading them back now, and considering it’s Easter time, I was reminded of a famous fable.

‘The goose that lays the golden egg’ is a fable in which a farmer and his wife are fortunate enough to have a goose which day after day produces a golden egg. The eggs are produced regularly and therefore the couple could rely on this source of income.


However, one day the couple became greedy and convinced themselves that because of the nature of the eggs which the hen laid, there must be a lump of gold inside of her. So, like all greedy people who are impatient, they killed her. Only to find, there was no lump of gold.

“Killing the golden goose” is now a popular British saying which is used when a short-sighted action destroys something which is profitable.

This could almost be a modern day fable for the gold standard. Governments claim the gold standard reduced flexibility when it came to monetary policy – for example it would not allow them to alleviate problems in tough times, ‘boost growth’ or spend in emergency times.

By killing the gold standard and abusing what was left – the paper money and the confidence in the monetary system – the government have been left with a worthless chicken which will not last forever.

Killing the Gold Standard goose

Last month when Ben Bernanke discussed the gold standard in his speech at George Washington University, Business Insider excitedly declared he had ‘just murdered the gold standard.’ They have no idea just quite how literal they were being.

Of course, as many have now pointed out, Bernanke’s arguments against the gold standard were nothing more than the usual Keynesian or Monetarist propaganda. However his justifications for ‘murdering’ the gold standard were nonsensical. For instance, he claimed the gold standard had never really worked since WWI, but this was when the Fed was set up and the Gold Exchange Standard, a bastardised variant pursued and manipulated.

Claims by Mr Bernanke that the economy was far more volatile during the days of the gold standard is not ground-breaking new stuff. But the number of fiat supporters who use this argument whilst losing half of their memory is quite impressive. Before the both the Federal Reserve and government manipulation of the gold standard there are no records of hyperinflation all records of hyperinflation, according to Bernholz, occurred after 1914 (apart from the French Assignats). Critics also seem to forget the Great Depression, the inflation of the 1970s, various crashes between the 1980s and 1990s across the world, and of course the current crisis which the Fed and other central banks are muddling their way through.

Gold control

We now live in a world in which we are blind to the negative effects that money creation has caused. The rules of a metallic standard ensured the public’s transactions regulated the amount of money and keep the parity and market price in line with one another; controlling the supply of the metal. Bernholz (2003), amongst others, argues the metal is a finite resource therefore inflation is limited to new metal discoveries.

Chatham House wrote earlier this year, “although the discipline a gold standard imposes on monetary policy may have been helpful in limiting the reckless banking and excessive debt accumulation of the past decade, the rigidity of a fixed price for gold would likely have been a serious handicap with the onset of the financial crisis when a much more flexible monetary response was required.” (such a credit crunch would never have happened under the GS) Yet since departure from the full gold standard in 1914, inflation and the money supply (particularly since World War II) have increased dramatically resulting in a devaluation of the British pound of 90%.

Rolnick and Weber (1998) find the rate at which the primary money supply (gold and silver coins) under a commodity standard grows is limited by technology (key point in the modern context) – therefore money growth is matched by output in the long run. They ask why, in today’s monetary environment governments do not choose to have fiat money grow at a similar rate – why do they choose to have the money supply grow faster than output? Welfare has suffered from this inflationary burden; Prices since 2006 have risen faster than wages and living standards have not improved for six years – the longest period since 1925.

Since the closing of the gold window ‘the rules of the fiscal game have been profoundly altered,’ (Stockman, 2011); Dollars can now be printed ad infinitum and as a result the can US import cheap goods (devaluing dollar should benefit US exports, not imports) from other countries and export price inflation. Due to this Dollar-centric system, the US has now seen ’33 years of continuous, deep current account deficits at 3-5% of GDP – external deficits which have now accumulated to more than $7 trillion since the 1970s,’ (Stockman, 2011).

Under the Classical Gold Standard, it was impossible for one country to trade with another who did not buy in turn; however, clearly this control is now gone. Western economies such as the US and UK have experienced deindustrialisation and an expansion of credit. The Dollar, according to the Economist, is punching ‘above its economy’s diminished weight in the world. America’s share of global output (20%), trade (only 11%) and even financial assets (about 30%) is shrinking, as emerging economies flourish.’ The UK is now the most highly leveraged Western nation – we owe 5 times more than we earn each year, whilst the US public debt burden has climbed from $293bn in 1961 to $15.6 trillion and counting. Yet both countries continue to be told how much better the economic outlook is looking.

Meanwhile the dollar, the euro and the pound have all dropped by at least 3.5% against gold in the last quarter.

How do we bring back the golden goose?

When the farmer and his wife killed their golden goose, they did so not just out of greed but for want of control. They wanted to be able to control how much gold they had, rather than relying on the steady egg production of the goose. This is similar to the gold standard which was destroyed because government wanted control. Prior to this gold had been chosen by the collective wisdom, endeavour and dealings of the market, because it was a free and safe currency. The market had democratically opted for gold, and silver, as the optimal forms of money.

Detlev Schlichter makes an excellent point when it comes to debates on the gold standard vs. fiat money, they focus on history more than on the economics. History tells us what did happen, but never what must happen. Schlichter suggests that for the debate to move forward we must bring our opposing economic views to the fore, he believes it all comes down to one question; “For a functioning market economy, is it better to have a type of money whose supply is inelastic or one whose supply is elastic?” This may not be surprising; a market economy looking to a money that is most often chosen by the market.

It now seems some countries are beginning to acknowledge the benefits of an inelastic resource and are taking advantage of the growing price of gold as the money supply of Western currencies also grows. Perhaps the golden goose isn’t dead after all…

Protect yourself from bankers and politicians. Buy gold bullion safely and securely with The Real Asset Company.

Jan Skoyles contributes to the The Real Asset Co research desk. Jan has recently graduated with a First in International Business and Economics. In her final year she developed a keen interest in Austrian economics, Libertarianism and particularly precious metals.  

The Real Asset Co. is a secure and efficient way to invest precious metals. Clients typically use our platform to build a long position and are using gold and silver bullion as a savings mechanism in the face on currency debasement and devaluations. The Real Asset Co. holds a distinctly Austrian world view and was launched to help savers and investors secure and protect their wealth and purchasing power.

© 2012 Copyright Jan Skoyles - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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