Sunday, June 9, 2013

Political Freedom and Monetary Policy

For Ron Paul, the retired libertarian US Congressman, the choice between political freedom and tyranny is closely associated to monetary policy. In other words, no matter how nations imagine that they are free but if their monetary system tells otherwise, in reality their present situation is heading towards tyranny and will get even worse not until the primary cause has been removed. 

I found this argument while reading "Five Myths of the Gold Standard" (Pillars of Prosperity, 2008, pp.122-128), a testimony made by Ron Paul before the subcommittee on mines and mining in October 2, 1980. In this testimony, he demolished five tales surrounding the gold standard. Allow me to enumerate them with corresponding refutation based on my understanding of Ron Paul's testimony:

Tale # 1 - The supply of gold is insufficient.

This is a scare tactic used by those who reject the gold standard. This kind of incident can only happen if someone manipulates the gold supply. The tale is simply untrue for it violates basic economic principles concerning price of any commodity. The increase in price will always guarantee the continuous supply of that commodity.

Tale # 2 - Both Soviet Union and South Africa not only would greatly profit in a gold standard, but they could even take the US economy under hostage for they are the world's primary gold producers.

There is no way that both Soviet Union and South Africa could hostage US economy in a gold standard. It is also not true that their profit will increase compared to what has been happening since 1980 due to inflationary monetary policy, which is the real threat to US economy with its "politically-printed paper money and a fractional gold reserve" (p.224). The present monetary system is the one causing fear and panic among the people. Therefore, a return to gold standard will actually accomplish three things - giving stability to gold price, an end to inflation and elimination of fear and panic.

Tale # 3 - It would cause a depression.

A return to gold standard will cause depression only if it is done improperly. I understand this improper return to gold standard in two ways - not taking into consideration the total quantity of printed USD and government interference in setting up an artificial price for gold. Besides, even a return to gold standard is just part and parcel of an entire sound monetary system. With it, there must also be an end to budget deficit, printing of paper money together with tax cuts and reduction of regulations.

Tale # 4 - It will cause inflation.

Whether your understanding of inflation is the popular one, still this tale is baseless. For Ron Paul, the gold standard instead of resulting to inflation as the myth makers assert is in reality the way to solve it. He said, "...the gold standard does promise a way out of our current inflationary impasse. Rather than causing inflation, the gold standard has historically been a bulwark against inflation."

Tale # 5 - The gold standard is prone to "undesirable speculative influences". 

The speculative influences is said to be connected to the fact that gold as commodity is used in jewelry. Here we find the vast difference a sound economic theory makes in seeing tales like this. Mainstream economists see speculation where there is none and they don't see "undesirable speculative influences" that happens daily related to USD. For an Austrian economist like Ron Paul, it is the other way around. What's happening daily in the USD is real speculation and the fact that gold is a commodity safeguards it from those speculative influences. So the gold standard is actually providing us the remedy from those baseless fears.

There is no better way to finally silence this myth than giving a full paragraph from the book:
"A gold standard would eliminate all speculation about the political motivations of the monetary authorities in governing the supply of money. The great virtue of the gold standard is that it removes discretionary power over the money supply from any one agency, thus ending the most fertile source of speculation. A gold standard puts the power of the monetary system into the hands of its people and takes it away from the politicians and the bankers, thus removing a potential vehicle for establishing a tyranny." (p. 127). 
In closing his testimony, Ron Paul issued a challenge: "Shall we have gold and political freedom or shall we have paper and political tyranny?" (p. 128) It is our hope that increasing number of people not only in the US but also in the Philippines as well as other parts of the world will see the relevance of this question. 

Reference: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.