One of the sorriest aspects of almost all political discussions nowadays is how often they seem to degenerate into rude ad hominem attacks rather than more reasoned arguments over the pros and cons of what public policies might be most conducive to achieving various social and economic goals.
An example of this is an opinion piece by economist Paul Krugman in The New York Times (July 13, 2020), in which he tries to dismiss those who question the current system of central banking and wide discretion by the monetary central planners by calling them “Goldbugs for Trump.”
He starts out by emphasizing that being a “real” and successful economist requires hard work, creative originality, and rigor in using “the facts.” Many are called, but few are chosen, he implies. So, what are the mediocre second- and third-best to do? Well, they can accept their mediocrity, and leave it at that. Like most other things in life, they, too, will pass without leaving much of a trace.
But what if you do not want to accept this lesser state within the economics profession compared to some like, well, Paul Krugman, who was awarded a Nobel Prize in Economics in 2008? How might the mediocre make a name for themselves? According to Krugman, the path to fame and fortune for the intellectually underprivileged is to become a charlatan, an economic huckster advocating kooky and crazy ideas that no reputable economist would be caught dead believing.
Ad Hominem Attacks
Krugman takes aim at Judy Shelton, who has been nominated for a seat on the Federal Reserve Board of Governors by President Trump, whose nomination successfully passed through the Senate Banking Committee and which should go before the entire Senate for a vote at some point.
What is Shelton’s intellectual “crime” in the eyes of Krugman and others? She has argued that the money supply in the United States should be anchored to a commodity like gold, to limit discretionary expansion and manipulation and thus reduce the economic instability and volatility that exists under our present system of fiat money (money backed only by government promises) and monetary central planning. In other words, control of the money supply should be, at least partly, taken out of the arbitrary hands of those who currently manage America’s central bank.
In Krugman’s mind, this is the last thing we should want. The Federal Reserve has to be in the hands of free and unrestrained monetary central planners to allow them to micromanage the macro-economy in order to ensure “full employment” and stable growth. They are the experts, after all, worldly and wise government-appointed men and women. This only applies, of course, if those selected to serve on the Federal Reserve’s Board think pretty much like Paul Krugman. Then they can be trusted with their hands on the monetary printing press and control over the economy as a whole.
As far as Krugman is concerned, how can anyone think, like Judy Shelton, that central bankers should not be “independent” and free to do whatever they think best? There must be nefarious forces at work behind anyone who would endorse and attempt to make the case for something as ludicrous as the gold standard. Krugman points to “some billionaires . . . who have a thing about gold” represented by a vile caricature: “the angry old white guy ranting about big government” who is fearful of “big-government types inflating away his hard-earned wealth to give it away to The People. And the billionaires give away a lot of money to libertarianish think tanks that peddle gold standard derp.”
A gold standard advocate must be a corrupt person hungry for the public recognition they lack the talent to earn as any real merit as an economist, says Krugman:
“Now imagine yourself as a conservative who writes about economics, but who doesn’t have the technical proficiency and originality needed to get a good job in academia, an economic policy institution like the Fed, or a serious think tank. Well, becoming a vocal gold-standard advocate opens a whole different set of doors. You’ll have a much fancier and more lucrative career, get invited to a lot more stuff, than you would if you stayed with the professional consensus.”
By this method of ad hominem attack, Krugman can shunt aside an entire tradition in economics that for more than 200 years has rightly questioned the wisdom of placing such control over the monetary system into discretionary hands, economists who have wondered whether, at the end of the day, any form of monetary central planning might not end up causing more instability and economic distortions than if money was anchored outside of government or an appointed group of central bankers.
Adam Smith’s Warning
The general skepticism of many economists for well over two centuries is captured in a famous passage from Adam Smith’s The Wealth of Nations (1776), in which he warned,
“The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.” (1904, Cannan ed., p. 423)
In the nearly 250 years since Adam Smith penned these words has it not been shown, over and over again, that placing wide and unlimited powers in the hands of those in various political positions leads not only to corruption and abuse, but all too often to an arrogance and hubris that the holder of such power has the knowledge, wisdom, and ability to plan and direct the lives of others better than they can themselves? How many such episodes have not resulted in economic disaster and political tyranny and mismanagement?
Krugman shoves all this aside. I would ask Krugman to think for a moment of the politician or would-be politician that he trusts the least and hates the most. Would he want that person as president of the United States, or as chairman of the Federal Reserve Board, or as the government’s redistributor of wealth and regulator of all economic activity?
Oh, wait! There is such a person already president, right now, whom Krugman no doubt trusts the least and hates the most. Would he also want such a person in charge of or helping to decide monetary policy? Oh, wait! There is such a person that he fears might be appointed, right now, to such a position at the Federal Reserve.
This is why all political power and discretionary authority must be restricted and restrained by constitutional limits, legal transparency, and other institutional checks. Would Krugman want Donald Trump to be president without the countervailing authority and constraints that limit his actions in the forms of the Congress and the judicial system? Or the Bill of Rights in preventing a president from arbitrarily shutting down the media and opposing points of view because he considers them “fake news?”
Ricardo’s Criticisms of Inflation-Funded Deficit Spending
To ask the question is to answer it. The same should apply to the monetary system of any country. During Great Britain’s long wars with first, revolutionary, and then Napoleonic, France, the British government financed a good part of its expenditures with monies borrowed from the Bank of England. When the quantity of banknotes issued to supply these loans threatened to push the bank into insolvency because of a lack of gold reserves to meet redemption requirements in specie, the government passed in 1797 the Restriction Act, which ended redemption of Bank of England banknotes in gold.
This policy continued into the 19th century until well after the defeat of Napoleon in 1815, when, finally, specie redemption was again made legally required through the Resumption Act of 1823. For many years during the wars, there were apologists for the government’s relationship with the Bank of England, and deniers of a link between the issuance of large quantities of banknotes and the depreciation of the British currency.
David Ricardo (1772-1823), whom I hope Krugman would not consider to be a charlatan or a conman, wrote a famous monograph on “The High Price of Bullion” (1811), in which he drew upon facts to demonstrate the connection between the expansion of the currency and the falling value of the British pound on the foreign exchange markets.
Ricardo concluded with a call for a return to gold redemption at a fixed rate, because only through such a method could the stability of the currency be better secured and the abuse of creating money to cover unending government expenses might be hindered for the sake of fiscal responsibility and monetary order. Said Ricardo,
“It will be a circumstance ever to be lamented, if this great country, having before its eyes the consequences of a forced paper circulation in America and France [their serious episodes with paper money inflation], should persevere in a system pregnant with so much disaster. Let us hope that she will be more wise.
“It is said, indeed, that the cases are dissimilar; that the Bank of England is independent of Government. If this were true, the evils of a superabundant circulation would not be less felt; but it may be questioned whether a bank lending many millions more to the Government than its capital and savings, can be called independent of that Government. . . .
“The only legitimate security which the public can possess against the indiscretion of the Bank is to oblige them to pay their notes in specie [gold]” (The Works and Correspondence of David Ricardo, Vol. 3 [1951], pp. 97-99).
Mill’s Argument for Gold
The dangers from paper monies under the discretionary control of governments and their appointed central banks was also emphasized by another classical economist of the 19th century, who, again I hope, Krugman would not consider to be either an intellectual “nut” nor a “scandalous” apologist for laissez-faire: John Stuart Mill (1806-1873). In his Principles of Political Economy (1848), Mill argued that a country’s monetary system could be neither secure from abuse nor free of arbitrary variation in the value of the currency if not linked with a commodity such as gold for which it was legally redeemable:
“No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it. . . . All variations in the value of the circulating medium are mischievous; they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious. . . .
“Great as this evil would be if it [the supply of money] depended on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [nonconvertible paper money] as possible, each issue being itself a source of profit. Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed. . . . Such power, in whomsoever vested, is an intolerable evil.” (1909 Ashley ed., pp. 544-546)
Walker on the Threats from Political Paper Money
Finally, I would like to draw attention to the arguments of the American economist Francis A. Walker (1840-1897), who was a professor at Yale University, lecturer at Johns Hopkins and Harvard Universities, and later superintendent of the Massachusetts Institute of Technology (MIT). Since 1947, the American Economic Association has issued the Francis A. Walker Award every five years to recognize a member’s lifelong contributions to the profession. Francis Walker hardly seems to deserve being ranked as a past publicity hound in search of undeserved recognition.
Walker admitted the many arguments that had been made about the hypothetical advantages of a managed paper currency: saving on the resources consumed in gold mining and minting; the lower costs than those of securing and maintaining the supply of gold used as money; and the capacity for wise and deliberative monetary managers to try to establish a more stable currency against the uncertainties of general economic circumstances.
But even with all of these compelling arguments, Francis Walker still insisted that a commodity money such as gold was preferable, with banknotes redeemable in what he called an “economic money”, a money originating in and connected with market forces of supply and demand, and outside of any direct government control.
In contrast was “political money”: irredeemable paper currencies controlled by governments that always run the risk and historically have ended up, time after time, being misused and abused for various fiscal and special interest purposes. In his Political Economy (1887), Walker argued, “In the case of every proposed political institution or arrangement, however, we are bound to investigate not its possibility only but also its probabilities.” When looked at realistically in terms of the incentives, motives, and political pressures on those in and around government and its agencies, political money is extremely ill-advised, Walker wrote:
“The man who advocates government issues, without being prepared to show reasonable ground for believing that they will not be abused as to accomplish more evil than of benefit, is not entitled to be listened to. After the experiences of the past hundred years intelligent men rightly refuse to take the trouble even to discuss political schemes which assume impossible virtues which disregard the actual conditions under which alone it could be set to work.
“In the case of government paper money, the liability to abuse is found in the tendency of over-issue; to this end the fiscal exigencies of government are likely to combine with a popular craving for a money of diminishing value. . . .
“When once the traditional fear of paper money is worn off, the only safeguard against over-issue is found in far-reaching, conscientious, disinterested and courageous statesmanship. All the selfish interests that make themselves felt, all the passions of the hour and the appetites that clamor for indulgence, favor expansion. There is an unremitting pressure on that side, which now and then rises to furious impulses against the frail barrier that withstands inflation. . . .
“Moderation in the issue of government paper money does not form a political habit which becomes a security against abuse. On the contrary, the longer the regime of inconvertible paper money lasts, the greater the danger. The popular mind becomes accustomed to the sight and the thought of it; the fear of it is worn down; a generation comes upon the stage that has not known metallic money, or bank money convertible into coin on demand. . . .
“The exigencies of the public treasury constitute, perhaps the most formidable of the two dangers which menace the integrity of a paper money circulation. . . . In all free governments, or governments much subject to popular impulses, a second danger of over-issue arises from the appetite which is engendered in the masses of the people for further emissions for the purpose of scaling down debts, ‘making trade good,’ or enabling works of construction and extensive public improvements to be undertaken, for which taxation could not easily provide the means. . . .
“Having reference exclusively to economic interests, we may confidently say that the man who advocates the scaling down of debts, for the sake of encouraging trade and production, shows himself so ignorant of history as to be a wholly unfit advisor as to the present and the future” (pp. 352-357).
In drawing upon these extensive quotes, it may be said that I am merely “arguing from authority” and the words of even respected economists from the past do not prove the validity of a theory or a policy position. This is absolutely true. Many are the wrong-headed ideas that have been held by even the most honored members of the economics profession in both the nineteenth and twentieth centuries.
But reference to these economists and their ideas is meant to highlight that criticisms of paper currencies and the dangers from central banks having discretionary powers over them are not simply the policy rantings of cranks and con men, as Krugman wants to imply.
America’s Disastrous History with Central Banking
Now, Krugman is certainly at liberty to make a reasoned case for paper money (or the ethereal computer equivalent) and to offer evidence that such a money and its management by monetary central planners will not fall victim to all the pressures and passions, as Walker put it, that have been seen over and over again during the last 200 years.
From the time the American central bank was established in 1913 and began operating in 1914, the U.S. economy has been on rollercoaster rides of booms and busts, inflations and recessions, and fluctuations in economy-wide employment and output. The Federal Reserve used its new powers to fund a good part of the government’s military and related expenses during the First World War, with a resulting high inflation followed by a short-lived postwar deflationary depression.
The central bank then attempted to artificially maintain a relatively stable price level during much of the 1920s, creating imbalances between savings and investment that set the stage for the economic downturn of what became the Great Depression of the 1930s, made worse by even more monetary mismanagement in the face of the intensifying economic contraction. The Federal Reserve proceeded to turn on the monetary spigot again to fund the government’s expenditures of the Second World War.
Several relatively minor recessions in the 1950s were followed by the Federal Reserve covering the government’s deficit spending on both “guns and butter” in the 1960s: the war in Vietnam and the Great Society programs. This was followed in the 1970s by the worst price inflation since the Civil War, which was combined with rising unemployment, a phenomenon that became known as “stagflation.”
Monetary madness slowed down with Paul Volcker’s determination as Federal Reserve chairman to end this inflation in the early 1980s by putting the brakes on the money supply. The Fed reversed course to fuel the high-tech boom of the 1990s, followed by the monetary expansion after 2003 that set the stage for the financial crisis of 2008-2009. In the wake of the resulting economic downturn, the Fed followed its new policy of “quantitative easing,” the new term for creating even more money at near-zero rates of interest.
Now, with the government-imposed collapse of the U.S. economy through the commanded shutdown of economic activity in the face of the coronavirus crisis, the Federal Reserve has lost all sense of any meaning to monetary restraint, letting loose a tidal wave of trillions of more dollars created not over years but a matter of a handful of months—with even more to come, it seems.
Paper Money and Central Banking Are What Should Be Challenged
This is not the record of a wise, judicious, and intelligent management of the American monetary system over a century during which the dollar’s link to gold was first weakened, then broken, and finally ended by the 1970s. Is a gold-based currency the best one? Might a fully private, competitive banking system not be a far better one? These questions concerning a future monetary system for the United States are, in my view, reasonable and realistic policy topics for debate. (See, for examples, my articles on “The Myth that Central Banks Assure Economic Stability” and “Gold and Free Banking versus Central Banking.”)
What has far less credence in the face of all that has happened under monetary central planning in the United States since the establishment of the Federal Reserve over a hundred years ago is the arrogant presumption that central banking and monetary discretion has in any way shown itself as anything other than bankrupt.
Krugman has every right to hide behind rude and crude ad hominem attacks on those who do not share his views, but that does nothing to prove his case. It serves only to harm his reputation and legitimacy in the arena of public policy debate.
[Originally posted at the American Institute for Economic Research]