Matt: Really Stephen? The Gold Standard? Excuse me while I go for a drive in my Model T and then look at pictures of my girlfriend baring her ankle.
Stephen: Matt, can you explain to me why fiat currency is a good idea? I know the argument for, but do you?
Matt: It's a good idea because monetary policy is one of the most effective tools for ameliorating the volatility of boom and bust cycles and insuring long-term economic stability. There is only so much gold in the world. Meanwhile, there are nearly twice as many people as when we abandoned the last vestiges of the gold standard in 1971. An ever-growing global economy requires a flexible supply of money.
Stephen: What if it turned out that the federal reserves mismanagement of fiscal policy lead to the biggest boom/busts in US history? (The great depression and great recession? And for for good measure lets consider their actions in the 70s during stagflation). Please explain how currency manipulation creates stability?
Matt: Well, for every budding economist from the Austrian school, there is another who would argue that excessively hard fiscal policy prolonged the Great Depression. "Currency manipulation," aka monetary policy, creates stability because it prevents millions of citizens from being held captive to a resource that exists in finite amounts. We don't trade in hard currency anymore. Partying like it's 1929 wouldn't do anything to help the people who are out there struggling.
Stephen: You didn't answer my question. What if the Fed is causing all of the problems it was created to solve? What that be enough proof that fiat currency is bad? And for every budding blogger that believes that the Fed wasn't involved in problems the Great Depression there's a current Federal Reserve Chairman who believes otherwise.
Matt: I should clarify - I'm not stating my view, I'm stating the view of most mainstream economists. So if you want to strike "budding blogger" and replace it with "economic authority" in your last argument, by my guest. But don't twist Bernanke's words - he believes that the Fed worsened the Depression by reducing the monetary supply, which conforms more to my argument than yours.
Stephen: So at best the Federal reserve was unable to stop the Great Depression, at worst it deepened it. Ok good. That doesn't really help you at all. I'm arguing that currency manipulation is a bad idea. You cited an example when manipulating the currency failed us. Thus, I fail to see how that is a pro-Fed argument. Second, do I need to explain to you why a great deal of economists think that the Fed created the housing boom and bust through cheap credit policies? Guess they were unable to stop or the causation for the two worst financial crises in our history. And we need them why? To keep cheap credit up and government borrowing high? Let's not talk about what might happen if this current bond market bubble bursts.
Matt: Correct me if I'm wrong, but this debate is about whether or not we should have a gold standard - not whether or not the Fed always does the right thing. I'm arguing that "currency manipulation" (once again, read: monetary policy) is inevitable in a massive global economy. That's different from defending the Federal Reserve in each and every scenario. My point in bringing up the Great Depression was that Bernanke and most others feel it was prolonged/deepened by an excessively tight monetary supply. If we were to reattach our currency to a finite resource, this would be even more of an issue. You seem to be saying the fact that the Fed limited the supply of money during the Depression is an argument that we should have a hard currency, which would only worsen the same problem you're using as an example of the Fed's supposed failures.
Stephen: Couple problems here: as you said we are not debating "whether the Fed always does the right thing" and you then go on to say you do not have to defend the Fed's errors. But what I am saying is that the fed is a failure because of its ability to manipulate currency. This, since manipulating currency so often results in failure (as you agreed) I am questioning why we place such reliance on this as opposed to a set currency that has real backing. Additionally, has the Fed been successful in maintaining price stability? I would argue not as a basket of goods worth $100 in 1970 would cost nearly $2500 today. Nice stability!!
So if we create a
governing body to keep price stability and it fails to do that, and we
ask it to prevent recessions and it fails to do that why are you holding
it in such high esteem? Forget the gold standard, do you think the Fed is a useful/successful organization and should it continue in its current form or be modified at all?
Matt: See to me, as I said, these are two separate debates. On the gold standard, you're arguing against yourself by saying that because the Fed made a bad decision to restrict the money supply during the Depression, that means we shouldn't have a Fed at all, which would only restrict the monetary supply further. I'm saying it needs to make better decisions. You bring up several examples of poor decision-making, so here's a counterpoint: increasing the supply of money has pretty clearly eased the current crisis. One bright spot in the economic situation has been exports (fueled by a weaker dollar), which are helping to drive a resurgence in US manufacturing (nearly 500,000 jobs since Jan 2010) and other export-related industries. If you're going to use bad decisions as evidence that the institutions that make them shouldn't exist in the first place, we might as well not have a Congress either, right? Don't mistake the forest for the trees.
Stephen: Matt, you have to stop saying ridiculous things, you just made me start laughing at work and everyone started looking. Increasing the supply of money has pretty
clearly eased the current crisis? Did you just pull this straight out
of your ass? QE has done very little to stimulate the economy and Operation Twist isn't doing much either except furthering a bubble (I'll assume you are OK with my claims that cheap credit helped fuel the
housing boom which was a major cause of the crisis to start with- add
this to the Fed's purpose). As for a declining dollar helping exports,
sure but is that the way for us to recover? As you so often point out,
we need to stimulate consumer spending, yet declining values of the
dollar means that personal savings are increasingly declining thus
hurting purchasing power and our ability to grow.
Stephen: Thank you for that admission. However I will agree only partially with you. Banks do need some regulations but lack of regulations is not currently an issue.
Matt: We're going to move on to the Fed's specific actions, and that's an area where we might find more agreement. But if this debate boils down to imperfect monetary policy vs. gold standard, I'm going with imperfect monetary policy 100% of the time. Even if monetary policy wasn't a good idea in the first place (I'm sympathetic to the people managing currency ), I argue that we're so far gone that going BACK to a hard currency would be disastrous at this point. Imagine yourself having a child that totally sucks. You can't just disappear the kid, a la Catch-22. Need to roll with it and find a way to make it work.
Stephen: Matt, out of this whole debate the "we can't go back" argument is probably the one I find the most compelling. Though, we will explore that (and if it's true) and what it's implications would be in another round.
Stay tuned for a follow-up to this discussion, wherein we will transition toward discussing the Federal Reserve itself. As always, please feel free to share your thoughts on the Gold Standard in the comments section.
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