During the past two weeks, James Florio, a former Democratic governor of New Jersey, and Steve Lonegan, the 2013 Republican nominee for U.S. Senate wrote opposing op ed pieces on the gold standard for New Jersey’s leading newspaper. That the gold standard is now being seriously debated by state-level pols in a mainstream media outlet is a remarkable and welcome development.
The piece by Florio–whose signature act as governor was significantly raising State taxes during the throes of the 1990-91 recession–is predictably inane, reiterating the tired old litany of misconceptions about the gold standard. Florio even conjures up two new ones. He bemoans unspecified “environmental harm” associated with seeking new gold supplies and cites the potential health hazards in disposing of arsenic trioxide, a toxic byproduct of the gold-mining process. Florio does not tell us if we should discontinue the large-scale use of this chemical compound in forestry products, colorless glass production, and electronics. Nor does he call for rescinding the FDA’s approval in 2000 of the use of arsenic trioxide (Trisenox) for treating certain forms of acute leukemia.
In his response , Mr. Lonegan does a good job of rebutting Florio’s spurious charges against the gold standard. Unfortunately, Lonegan gets himself into difficulties by his failure to recognize the difference between the pre-1914 genuine “classical” gold standard and the post-World War 2 Bretton Woods system, which was an intergovernmental price-fixing scheme masquerading as a gold standard. Lonegan laments the collapse of the Bretton Woods phony gold standard in 1971, which was inevitable and long foretold by leading advocates of the classical gold standard like Jacques Rueff, Henry Hazlitt, Michael Heilperin, and Ludwig von Mises. Even more worrisome is the fact that Lonegan accepts the view promoted by proponents of restoring a Bretton Woods-type monetary system like Nathan Lewis and Steve Forbes that a mystical property of gold somehow ensures a stable value of money without limiting its supply. Writes Lonegan:
The gold standard insures the quality, i.e. buying power, of the dollar. It doesn’t limit the quantity of money. As economist Nathan Lewis has calculated, from 1775 to 1900 the money supply increased by 163 times while gold reserves rose only 3.4 times. The gold standard defines, rather than restricts, money.
In fact, it is precisely by strictly limiting the supply of money that governments and central banks were able to create that the classical gold standard enabled the value of money to increase, i.e., the level of prices to gently decline, for over a century leading up to World War 1. This deflation of prices , especially after the Civil War, was a necessary complement to the tremendous growth in productivity and living standards that occurred in the U.S. This experience directly contradicts the alarmist contentions of Lewis, Forbes et al. that falling prices lead to depression and unemployment.
For those who are interested in a critique of the monetary doctrines of the advocates of fixing or “targeting’ the price of gold while maintaining our current fiat dollar, I have recently written two short pieces on the topic (here and here).