Thursday, November 15, 2007

Ron Paul, Gold and the Left

Those who have paid even the most cursory attention to my occasional posts on this blog know that I am by no means an egalitarian. However I have to speak out concerning those of our countrymen on the left who would support the Hon. Ron Paul Tex. for president but are being turned off by his support for the gold standard.

Those who are trying to do a hatchet job on Ron Paul are saying that the gold standard is nutty and reactionary. In fact there are several things about the gold standard that should make left support it.

A. Under the Federal Reserve Them What Have Get More Than They Otherwise Would

First let us look at that perennial complaint of the left, that profits are to high and wages to low. Now whether any particular ratio of wages and profits are optimal is to my mind a question generally best left to the market.

However it is undeniably true that the current system of fiat money elevates the profits of business. Consider that in a given period costs of goods sold are fixed, representing wages and investments in plant and equipment that are already made. These same moneys are then used to buy the products of businesses. When new money is injected into the economy by the federal reserve, that new money is business revenue for which there is no corresponding cost. Since profits equal sales revenue less costs, this this new money always increases the dollar amount of profits.

B. The Gold Standard Subjected the Working and Middle Class to less Investment Risk

Second, the federal reserve system tends to wipe out the savings of the working class and middle class. Traditionally, the financially less sophisticated who tend to be less well off saved in two ways.

First they “banked with their teapot.” In other words they put their money in a safe place and saved that way. Today such a course of action would be madness, the value of the money would be inflated away. If for example one put a hundred dollars under a mattress for 20 years and there is a two percent annual rate of inflation, then at the end of the period the money would have lost about 25 percent of its purchasing power. In contrast between the founding of the Republic in 1789 and the founding of the Federal Reserve Bank in 1912 the purchasing power of the dollar increased by one hundred percent or about half a percent per annum. Thus if one tucked a hundred dollars under ones mattress for 20 years it would increase in value by 10 to 12 percent. In other words under the gold standard the financially less sophisticated had a way saving money and getting a small return without subjecting them to the financial risk that they must brave today.

Second they bought sound bonds. Under the current fiat system this is a sucker bet, unless one takes on huge amounts of risk on so called junk bonds, the returns are eaten up by inflation. In contrast under the gold standard, the bonds of railroads and utilities offered the financially unsophisticated low but constant returns on their investments. It was for example possible to buy bonds that had a fixed rate of interest of 3 percent paid year in and year out for 150 years. Thus the poor but thrifty worker could lend the hundred dollars he had saved to the railroad and know that he would be getting three dollars in interest every year for the rest of his life. Over time the interest he was receiving would grow in value as the purchasing power of the dollar increased. When he died the same fixed rate of interest would be paid to his widow and then his children, grandchildren and great grandchildren. A hundred and fifty years later when the principal was repaid by the railroad to his great grandchildren it would have had twice the purchasing power it had when he lent it. I say would have had, because since the establishment of the federal reserve bank in 1912, the dollar has lost 99 percent of its purchasing power. That is to say a dollar today has the same purchasing power as a cent had in 1912. Thus the great grandchildren would not receive not twice the purchasing power as the thrifty saver had expected, but one hundredth the purchasing power of the principal.

C The Gold Standard Allows for Long Range Planning

This leads me to my last point about the Gold Standard. It allows individuals, associations, and corporations to make long range plans.

It is a regular complaint from the left that corporations are short sighted. They don’t invest enough in research and development. They don’t look at technology that could be profitable over the long run and have substantial social or environmental benefits, because they are to focused on the short term return.

Well if one thinks about it this is no surprise. How can a company think about long range projects when it has no idea about the rate of inflation in the future. Suppose that an investment is sure to pay $100,000 every year for the next fifty years. If the inflation rate may bounce around from 1 percent to 20 percent or even higher how does one value that stream of income? The fiat money system is like putting Vaseline over the telescope through which companies and individuals try and look into the future. Think about the lender who bought the 150 year bond thinking he was leaving a legacy to his great grandchildren but who instead left them a penny.

In the 1890s under the gold standard, railroads and savers believed not without reason that they could plan, invest and borrow over a 150 year time horizon. Today the federal government and those who lend to it don’t believe they can plan beyond a ten to twenty year time horizon. That is but one effect of the abandonment of the gold standard.

D What the Left Once Knew

I will close with the words of the fabian socialist George Bernard Shaw who wrote in a leaflet on this subject, “the value of gold and silver money tends to maintain itself, while the value of paper money depends on the honesty and integrity of bankers and government officials, and with all due respect to those gentlemen, I must advise you as long as the capitalist system lasts to vote for gold.”

1 comment:

Archos said...

Hello Adams,

I have found your blog interesting. I myself am interested in the re-unification of English speaking peoples. I have entered the CBC's Canada's Next Great Prime Minister contest with an idea to create a political and economic union between Australia, Canada, the US, Great Britain, and New Zealand.

The more views and ratings I get, the better my odds.

Here is the link to the video:

If you share my same passion, please forward this link to others to get the word out! I would be very interested in hearing your thoughts on this subject!