Paul Krugman’s last two columns have been about the obsession of conservatives (especially libertarians) with gold backed currency. On Friday, he wrote, Lust for Gold. In it, he discussed the recent fall in the price of gold and how it will not affect the way that goldbugs think about the commodity. And then on Monday, he wrote, The Antisocial Network. In it, he wrote about Bitcoin and how its proponents are basically obsessed with the same thing that motivates the goldbugs: “The government is devaluing my money!”
Then yesterday, Wall Street analyst Barry Ritholtz wrote an amusing article about the culture of the gold devotees, 12 Rules of Goldbuggery. Basically, he says that goldbuggery is a cult. People who are members of it are (like so many things that are political in nature) not responsive to evidence. The 12 rules come down to this: the price of gold can never go down and if it does go down, it isn’t economics, it is government manipulation.
As regular readers know, I used to be a libertarian. But even at my most fanatical, I never understood the gold standard obsession of the movement. (Actually, there were a lot of other things I never understood.) It was all based upon a kind of paranoia that the government was just itching to devalue the currency to impoverish the money of rich people. That’s a shocking claim when you consider the the government is run by a bunch of rich people. And that’s even more true of the Federal Reserve. In theory, it is supposed to maximize employment and minimize inflation. In practice, it minimizes inflation.
There is another side to the gold standard obsession—one that is a lot harder to understand. These people think that the value of gold is fixed. I think this is standard conservative thinking that the way things have long been is the way things ought to be. You see this all the time with the “under God” phrase in the Pledge of Allegiance. Many conservatives I’ve talked to will simply not accept that it is a fairly recent addition or that if it wasn’t always there, it should have been. In other words: whatever the world was like when I was a kid is what is right. So with gold, conservatives have this idea things must have been perfect in the long ago past because currencies have “always” been based upon it.
The truth is that gold is not that useful a metal. And its supply can certainly be manipulated. I remember reading about a king of what is now more or less Chad. This is many hundreds of years ago. He took a trip to the Middle East. In the process, he spread so much gold around the it created a years-long inflation shock. But we don’t have to go back that far to show the instability of gold. Since August, the price of gold has gone down 25% (most of that in the last week). In that same time, the dollar has been quite stable and inflation has been moving at about 2% annually.
The fundamental problem is that a gold-based currency is valuable only in as much as people think that gold is valuable. And this is the same thing as for so called fiat money. Think about it this way: what would you rather have: part ownership of Samsung that is actively exchanging products for other valuables or gold that very few people want? The truth is that gold is not much more valuable than tulip bulbs. In the end, you can’t build houses with gold and you can’t burn gold for energy and you can’t eat gold. So the belief that gold has intrinsic value is just wrong.
If you were preparing for life after some horrible tragedy, would you hoard gold? Of course not! You’d hoard food and batteries. I just don’t get why the goldbugs don’t see that this fact destroys their arguments that gold has some intrinsic and stable value.