The Gold Standard: Why it's not a measure

You might have thought that with my previous post, this blog would become all about fatherhood or something. Hardly.

I was listening to an Intelligence Squared episode: America doesn't need a strong dollar policy, and found myself incredibly annoyed by one argument that one side used. Worse than that, despite the fact that it's a false analogy, the other side never countered it! This angered me so much, that I have to vent here.

If you want to listen to the debate, now's your last chance before spoilers!

Steve Forbes and James Grant were arguing against the motion, thus in favour of a strong dollar policy. One of their arguments went something like this: If you were a carpenter, and the length of a foot changed from day to day, week to week, month to month, you wouldn't be able to ever know how much wood (in feet) you needed to be able to build a given house. In the same sense, the dollar's value cannot be allowed to change, so that participants in the economy can predictably know how much money they will need to execute a certain transaction. In order to fix the value of money, we peg the exchange rate from dollars to some commodity, say gold (at, for example, $35/ounce).

That sounds great! Now the dollar has a fixed value, and we can all go about our business, right? Wrong. Unlike something like a physical object (to which you can calibrate the measure of a "foot"), the measure of value can change over time. If demand for something increases, some people will be willing to pay more to ensure they get it, and so the price goes up. Same in the opposite direction. A good example is Tickle-Me Elmos. When those hit the market, they cost $28.99 in stores, but people would buy them for (i.e. they were worth) hundreds or thousands of dollars.

The same of course can happen on the supply side. If all the oil wells in the world dried up tomorrow, though demand for oil would be relatively constant, supply would be zero, and again, you'd have a frenzy of people willing to pay anything to get some.

Gold is not immune to the supply/demand pressures either. As a result, its value, relative to other items, can change because of human whim. So fixing the dollar to gold is almost no better than letting it float. Don't be fooled into thinking that the supply and demand for gold are constant, either. When the Spanish brought back vast amounts of gold from the "New World", the supply in Spain skyrocketed, thus the price went down. Instead of being rich, the Spaniards found that because everyone had more gold, things cost more gold to buy!

My point is that the dollar, even just as paper with nothing backing it, is just as good a proxy for value as anything else, even gold. What strikes me as crazy is that Steve Forbes, the man who wrote a book entitled: "Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t (2012)", doesn't see the free market involved in the changes in supply and demand for gold, and a reason that a gold standard dollar isn't any better than a floating dollar.