There is great confusion about the gold standard, for the same reason that there is great confusion about the free market: hardly anyone understands it. This includes academic economists.

Let me get in my fiat monetary unit's two cents' worth:

There are proposals for various monetary systems that are in some way tied to gold. There have been a lot of these proposals over the centuries. They all have one thing in common: they are ignored today by academic economists, commercial bankers, central bankers, national governments, the general public, and CNBC. Well, perhaps not ignored. More like ridiculed.

One of the standard arguments against a gold standard is this: "There’s not enough gold to facilitate all of the transactions in a free market economy." This is an old criticism. It was a lot more popular before the desktop computer industry started cutting prices every year, while increasing product quality. These days, people expect falling prices in desktop computers.

What if they expected price cuts in all other industries?

If you have ever wondered what would happen if a relatively fixed supply of above-ground gold were the primary medium of exchange, this essay may help clarify things.

Most people have no conception of what you are about to read. They are not interested. They don’t know that their futures will depend heavily on the answers to these questions that will be adopted by the Federal Reserve System’s policy-makers. They think, "I can’t be bothered with monetary theory." Therein lies your investment opportunity.

Let me present a syllogism. 1. Theft is immoral. 2. Inflation is theft. 3. Fractional reserve banking is inflationary. 4. Central banking is government-guaranteed fractional reserve banking. 5. Immorality leads to judgment.

Therefore, we should expect. . . ?

Economists, other than Murray Rothbard's disciples, never associate the concept of theft with monetary inflation. They speak of theft in terms of reduced efficiency and increased transactions costs, not morality.

When it comes to avoiding morality, they are worse than lawyers. A lawyer might appeal to morality if he had a really weak case. This appeal might persuade a jury. An economist would rather lose the argument than appeal to morality. He regards the shame of invoking morality as personally more inefficient than winning the argument by an appeal to morality. Once you appeal to morality, academic economic theory collapses. Economics was the first science to be self-consciously designed to avoid moral questions.

A cartel is an organization made up of senior managers or their representatives in an industry.

In reading any dialogue, you know in advance that the guy asking the questions is the guy who wrote

David Frum on the Gold Standard

David Frum is on the warpath. In a National Review Online blog post, then an NPR commentary, and most recently in a National Post article, Frum has mercilessly ridiculed the gold standard. But as with most modern critiques of the "bad old days" of the laissez-faire 19th century, Frum's analysis is fraught with theoretical and historical problems.

Frum's main objection is that the gold standard is allegedly rigid, preventing the economy from smoothly adjusting to various shocks:

Since permanently abandoning gold convertibility in 1933, the US economy has experienced far less economic volatility. Recessions are fewer and shallower (if sometimes longer).

Of course, that's not the only way to balance accounts. There is another, the way Americans experienced in 1837, 1857, 1893, and 1930-33. In those years, the value of the dollar was fixed to gold. (One dollar = 1/20 of an ounce.) If something bad happened in the world or US economy, the dollar could not adjust. A recession was like a car accident without bumpers or crumple zones — the full pain was conveyed uncushioned to the riders in the cabin. Domestic asset values collapsed. Unemployment jumped overnight to 15% or 20%. Homes were lost, businesses disappeared.

There's a lot packed into this quote, making it hard to choose where to begin. Let's start with the claims about unemployment. First, Frum makes it appear as if 15% or even 20% unemployment was something typical under the gold standard. But no, the depression of 1893 had unemployment in the low-teens, and this downturn is generally ranked as the worst in US history except for the Great one in the 1930s.