David Frum continues to demonstrate his ignorance of basic economics:
There are three fundamental things we want a money to do.
1) We want money to maintain a stable domestic price level.
2) We want money to maintain a stable relationship against other currencies.
3) We want money to be freely convertible into goods, including other moneys.
OK, so here’s the problem: No money can achieve all three of these good things…. The classical gold standard that prevailed in the United States for most of the period from 1789 to 1933 met requirements 2 & 3 – but not requirement #1….
Since 1971, we have lived under a regime that goldbugs denigrate as “fiat money.” The Federal Reserve tries to emit enough money to meet the needs of the US and global economies, with minimal inflation. Since 1982, the Fed has done a better and better job – and Americans have enjoyed a quarter-century of strong growth with infrequent and mild recessions. This new regime meets requirements 1 and 3: domestic price stability and free convertibility. It does not meet requirement 2: exchange-rate stability.
No wonder Frum’s predictions are reliably off-track. He makes statements that are not only wildly erroneous, but easily verified to be incorrect. Now, there are more fundamental concerns with a fiat currency than the three he lists here, but in the interest of demonstrating how badly he aft agley we’ll limit the analysis to the turf of his choosing. Consider his statement that the current fiat regime meets the requirement of domestic price stability, thus making it preferable to the gold standard which he claims does not provide price stability. In fact, the dollar has been significantly LESS stable domestically than it has been against most currencies not printed by the Zimbabwean government, unless by “stability” Frum actually means “smoothly declining into total worthlessness.”
From 1971 to 2006, that “stable” currency lost more than 80 percent of its domestic value. What was worth $100 in 1971 cost $518.96 in 2007. And that’s sans those “volatile food and energy” costs since, of course, no one ever eats food, heats their home or drives their car. By contrast, the fiat dollar has lost only 30 percent of its value since 1971 against the world’s currencies. So, that’s two strikes against the dollar and none against gold (at least in relation to the fiat dollar) by Frum’s own standard.
Nor does Frum even begin to address the primary argument against a fiat currency, which is that it is a hidden tax on those who save money rather than spend it, or better yet, borrow it. Perhaps he’ll finally admit that he’s wrong when the markets finally give up the ghost and the Keynesians and monetarists finally confess that the magic printing press will not and cannot solve the problems caused by the price bubbles it previously created.
Amusingly, Frum blithely recommends that his critics should do “some basic reading” rather than email him. But it’s quite obvious that it is Frum who needs to read Econ 101; he’s obviously quoting various statistics and opinions from economists without understanding the context behind them. Deflation!=recession anymore than inflation means economic growth.
And to summarize a more monetarily sophisticated argument: if you believe in a fake currency, you are a fake conservative.