The Euro: a Step Toward the Gold Standard?

by Andreas Hoffmann (University of Leipzig)

In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

There has been much criticism of the piece that mainly addresses the inflationary bias of the ECB. I actually agree with much of it. In particular, imperfect currency areas have the potential to restrict monetary nationalism. This can be welcomed just as customs unions that allow for free trade (at least in restricted areas). But I have some trouble with De Soto’s conclusions and the view that adhering to the euro (as did adhering to gold) gives an extra impetus for market reform – in spite of the mentioned e.g. labor market reforms in Spain. Continue reading

“Faith-Based” Money

by Jerry O’Driscoll  

“The Weekend Interview” in the Wall Street Journal (A11) is with James Grant. A financial and monetary iconoclast, Grant favors gold over “faith-based” fiat money. He is a trenchant critic of the Fed’s low interest-rate policies for “suppressing the proper functioning of the price system.”  

There is an Austrian flavor to Grant’s commentary, as when he defends “good deflation” resulting from “progress.” Bad deflation occurs as the result of a credit crisis. “The Fed refuses to make that distinction.”  

Why does he like the gold standard? “The gold standard, he says, citing the ‘late, great’ libertarian economist Murray Rothbard, was the ‘people’s system. If you didn’t like the currency, you could exchange your paper for gold and that sent a message.'”  

He also denounces Wall Street bankers, who get the upside while the taxpayer takes the downside. He is describing moral hazard in layman’s terms.  

Holman Jenkins did the excellent interview. Read it and enjoy.

Reform the Monetary System?

by Andreas Hoffmann*

Most economists agree that the latest crisis was caused by risk-taking incentives (competition for profits, wrong ratings, false policies, moral hazard) along with financial innovations that allowed banks to lend excessively. While monetary policy prevented, for better or worse, a collapse of the financial system, an increasing number of economists also agree that it is not possible to safeguard the financial system over and over again. There are limits to intervention. Therefore we have to find a way to deal with the very causes of the crisis. Continue reading