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Murray Rothbard's Gold Standard Nonsense

Why the amount of metal in a box should not force a currency devaluation...
ACADEMIC economists of every variety, along with high-fashion architects, are now generally regarded as deluded nincompoops – correctly, I would say, in both cases, writes Nathan Lewis at NewWorldEconomics in this story first published at Forbes.
Alas, this condition has also extended in the past to Gold Standard advocates, who, although their hearts are in the right place, have had a bad habit of spouting total nonsense.
One such person was Murray Rothbard, certainly a leading light for many decades, and who wrote a great many works of superlative insight. Unfortunately, his understanding of certain monetary details was really rather substandard.
By itself, this is not such a big deal. We all know the world is full of silly people, particularly regarding economic affairs. No man can be expected to be right about everything. However, Rothbard's wonderful contributions in so many other avenues led many to embrace without thought all that he had to say as holy writ.
Rothbard promoted the idea that the implementation of a Gold Standard system in the United States should be done through a "revaluation of gold", such that the supposed 260 million ounces held by the Federal Reserve and Treasury be equivalent to 100% reserve coverage of outstanding base money.
Here is Rothbard describing the scheme in his book The Case Against the Fed, which was first published in 1994 and represents Rothbard's understanding at the end of his life. (He died in 1995.)
"If we wish to revalue gold so that the 260 million gold ounces can pay off $404 billion in Fed liabilities, then the new fixed value of gold should be set at $404 billion divided by 260 million ounces, or $1555 per gold ounce. If we revalue the Fed gold stock at the 'price' of $1555 per ounce, then its 260 million ounces will be worth $404 billion. Or, to put it another way, the 'Dollar' would then be defined as 1/1555 of an ounce.
"Once this revaluation takes place, the Fed could and should be liquidated, and its gold stock parcelled out; the Federal Reserve Notes could be called in and exchanged for gold coins minted by the Treasury."
A "revaluation of gold" to a much higher number is a currency devaluation, and in fact "revaluing gold" is an old-fashioned term for currency devaluation.
When you "make the price of gold $1550 per ounce" instead of the $350 per ounce or so common in those days, you are in effect saying that the value of the Dollar is 1/1550th of an ounce of gold, instead of 1/350th. That is roughly a 4:1 devaluation, and would have the same effect as any other currency devaluation, including dramatic rises in nominal prices.
The spectacle of the supposed "sound money" advocate recommending a huge currency devaluation, for no good reason except "the amount of metal in a box made me do it," did not seem to strike anyone as odd, least of all Rothbard himself.
The value of a Gold Standard parity, after a period of floating currencies, is a topic of some deliberation and debate, although in practical terms governments mostly end up deciding that recent values are about right. The notion that this should be determined by the amount of metal in a box somewhere is delusional.
This was certainly not the way it was done when the US instituted a Gold Standard system in 1879, after eighteen years of floating currency beginning with the Civil War. The bullion reserve coverage at the reinstatement of the Gold Standard in 1879 was about 20%, and there was no "revaluation of gold."
For one thing, the amount of metal in a box can change. You can some gold, if you think that is appropriate, or sell some.
Many have argued that those supposed 260 million ounces are not really in the physical possession of the US government and Federal Reserve anyway, and haven't been since Nixon days; or perhaps that they have been repledged so many times that they have a myriad of ownership claims upon them. Perhaps a genuine investigation would only identify 50 million unencumbered ounces. That would have meant $8,080 per ounce in Rothbard's time, or a 23:1 devaluation.
Today, there are a lot more Fed liabilities (essentially Dollar base money) than in 1994. The Dollar monetary base was recently $4,015 billion. Using a bit of Rothbard-math, that would imply a "revaluation of gold" at $15,400 per ounce, or about a 12:1 devaluation. Assuming 50 million ounces of actual gold reserves, we get $80,300 per ounce, which is well into the realm of hyperinflation.
Implicit in this plan is the idea, promoted by Rothbard in the 1960s (" The Case for a 100 Percent Gold Dollar", 1962) that currency-issuing institutions, whether monopoly central banks or multiple private banks, should have 100% bullion reserves for outstanding base money. Such systems are possible, and I explain the exact methods for creating and maintaining one in Chapter 6 of my book Gold: the Monetary Polaris. However, they are almost unheard-of in history. In the 1833-1859 period, a time of "laissez faire free banking," US banks had bullion reserve coverage averaging about 20%, but this figure varied from 13% to 32% during that era. Individual banks would have had even more variance; a 20% average for one year reflects one bank at 10% and another at 30%.
The Bank of England had bullion reserve ratios that were wildly variable, particularly in the 1720-1845 period. So we see that this "100% reserve" notion itself had little basis in history and practical affairs.
Fortunately, we have much better understanding today of these matters than was the case in past decades. People like Larry White of George Mason University, Steve Forbes, Kevin Dowd of Durham University in England, Judy Shelton of the Sound Money Project at the Atlas Network and others are far beyond those sorry days of yore, and are today building the necessary foundation of understanding. There are others – Arthur Laffer knows a thing or two, although it seems he doesn't like to admit it in public. Charles Kadlec, a former Laffer associate, is very astute. Steve Hanke, of Johns Hopkins University, is somewhat agnostic on the topic of gold as a "standard of value", but he has great expertise in the real-world implementation of fixed-value systems of any sort.
Rothbard was better than most in those days. It was an era of mind-bending ignorance, not only among Gold Standard advocates, but across the spectrum of mainstream economics. I suggest you should laugh merrily and marvel that so many smart people could be so confused about what are actually rather simple topics. Then, ponder on what this has meant for the course of history and humanity as a whole. Express gratitude that we do not live in such dark times today. And finally: get on with the process of creating real-world alternatives to today's fiat-money madness.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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