To start, I sympathize with a gold standard, as does Tyler Cowen in a recent article on Bloomberg, but I still have criticisms and think that, in the end, it is not an optimal solution, even for the Rothbardian anarcho-capitalists who wish to see a free market in money. Robert Wenzel writes in a follow-up post his three issues with Cowen on the matter. I won’t cover every aspect of the argument here, but just would like to focus on more fundamental points. First, Wenzel writes,



Gold standards have always put some kind of check on government money printing. This is why governments always attempt to move away from a gold standard. There can certainly be plenty of money printing cheating if a gold standard is not constructed correctly but it is almost always better than a fiat money system unconnected to gold.

The first and third sentences are mostly correct, but the second is telling. If governments always try to remove a gold-based monetary system because it constrains their money printing policies, then why advocate for a gold standard at all since it will eventually be eviscerated and a pure fiat monetary system will reign (unless of course you are an anarcho-capitalist who wishes to see a stateless free market, in which case I will respond below)? Like Bretton Woods, which even Cowen admits had its faults, a gold standard of any kind will tempt a government to prevent market forces from working to eradicate gold outflows, perpetual fiscal deficits, and high inflation. So unless you are a devout Rothbardian who wishes for the complete absence of government in the economy, a gold standard is simply not a good long-term solution for monetary freedom.

Cowen’s call for a nominal GDP rule, on the other hand, is dressed up Keynesianism that can’t possibly work without major eventual Fed-cause economic crises.

There are a few responses to this. First, while I don’t favor the Federal Reserve’s current monetary policy, to say that nominal GDP targeting is inherently Keynesian forgets that the idea predates John Maynard Keynes with thinkers like David Davidson (who debated Knut Wicksell on the matter) and Samuel Bailey in the 19th century proposing similar ideas. In fact, F.A. Hayek favored nominal income targeting in chapter 4 of his book Price and Production (2nd Edition). Would Wenzel, therefore, call Hayek a Keynesian? Most likely not since he endorses Hayek on his view of Keynes’s “Ignorance of Economics.”

Furthermore, according to David Beckworth and Scott Sumner, nominal GDP targeting has a relatively good track record with regards to the performance of modern economies, despite Wenzel’s assertion that it must necessarily cause crises. One example is the Great Moderation (1984-2007) which saw less volatility in the U.S. economy when viewed against previous decades of fiscal deficits, recessions, and stagflation. While there were still mild recessions, inflation was low and growth was steady. While some critics, including Wenzel, point to the financial crisis of 2008 as proof that Greenspan’s monetary policy caused one of the greatest economic crashes in U.S. history, it has been argued by Sumner that the Fed’s policy changed several years before the fall in housing due to fears of deflation, so it is debatable if you can blame NGDP targeting specifically rather than the Fed’s reaction and change in perspective. Again, this is not an endorsement of the Federal Reserve, but a deeper look at the actual mechanisms at play.

Another more important example is Australia, which has not had a recession in almost 30 years (1992), despite it having an accommodating central bank. Its central bank has kept nominal GDP relatively stable for several decades, preventing any significant disequilibrium since adopting such a policy. What would Wenzel’s response to this be? Proponents of a gold standard would need to explain how it is possible for this to happen if they claim that progressive money printing causes the business cycle.

Finally, as I stated above, an anarcho-capitalist society wouldn’t be able to sustain a gold standard, at least the 100% full reserve version as some critics of the Fed propose. There are several reasons for this, but the most important point is the question of how it will be maintained in the eyes of the law. Gary North explains:

Mises believed that the civil government can and should use coercion to compel the honoring of contracts. Rothbard cited this passage as justification for a banking system in which fraud is prohibited. He regarded all fractional reserve banking as fraud. But he invoked Mises’s position at exactly the place in this essay in which he spoke to the issue of how, exactly, 100% reserve banking could be enforced. The key word here is enforced. Mises was crystal clear. The state should enforce contracts. But Rothbard, by citing this passage, gave the impression that he, too, believed that the state has an obligation to enforce contracts. This is the only statement in this essay which addressed the problem of how it is possible to get 100% reserve banking in an economy. Yet he footnoted Mises’s statement which called for the use of state coercion to achieve this result.

If a gold standard which prevents the printing of money or issuance of ficudiary media can only rely on government intervention in the monetary system, is it even possible for it to exist in a Rothbardian free market? Here’s North again,

I do not assert that Rothbard openly surrendered his position in this case. He surely appeared to, however. A reader unfamiliar with his anarchism or his defense of 100% reserve banking would have no evidence of either position in this article. But I do insist that by citing Mises in this instance in his defense of general law and tort law, Rothbard evaded the fundamental problem with his system of 100% reserve banking. The fundamental problem with his system is simple to state: there is no final agency for the enforcement of contracts that does not rely on the threat of violence. Rothbard’s theoretical rejection of the legitimacy of civil government inescapably moves his position on 100% reserve banking toward Mises’s system of free banking. Mises denied that the state should impose 100% reserves. Rothbard argued that there should be no state. This means — but he never said — that what Mises rejected as a bad policy, Rothbard rejected on principle: a state law mandating 100% reserves.

Without a definitive theory of a free market that can enforce 100% reserves without the existence of government, the proponents of a gold standard must therefore fight on two fronts. Our purpose here is not to eliminate the gold standard from the debate on which monetary system is best. It is rather to demonstrate that while the common arguments against gold are not always coherent or compelling, the arguments against rival theories like nominal income targeting by supporters of the gold standard are just as lacking. In addition, unless someone can advance the banking theory of Murray Rothbard to prove how a gold standard can persist from an enforcement perspective, then critics of the Fed like Wenzel should focus more on strengthening their own positions instead of attacking the ever-changing perspectives of Beltarians.