Milton Friedman and David Glasner: Real and Pseudo Gold Standards: Thursday Focus for September 4, 2014

David Glasner has an interesting–but I think flawed–note on the very interesting Milton Friedman paper “Real and Pseudo Gold Standards”–which David thinks is flawed:

David Glasner: Real and Pseudo Gold Standards: Could Friedman Tell the Difference? “One of the first academic papers by Milton Friedman that I read…

…was ‘Real and Pseudo Gold Standards’… presented to the Mont Pelerin Society… published in the Journal of Law and Economics in October 1961…. In the Mont Pelerin Society…. a perhaps more numerous faction… disdained any monetary system other than the gold standard… the unyieldingly stubborn Ludwig von Mises… the almost equally intransigent… Jacques Rueff…. Friedman was realistic enough to understand that one could not reason with von Mises…. Instead, his strategy was to say that there is only one kind of real gold standard…. Friedman acknowledged that a real gold standard could be defended on strictly libertarian grounds, he argued that a pseudo-gold standard could not, inasmuch as it requires all sorts of market interventions…. Here is how he put it:

It is vitally important for the preservation and promotion of a free society that we recognize the difference between a real and pseudo gold standard. War aside, nothing that has occurred in the past half-century has, in my view, done more weaken and undermine the public’s faith in liberal principles than the pseudo gold standard…. Those of us who support it in the belief that it either is or will tend to be a real gold standard are mistakenly fostering trends the outcome of which they will be among the first to deplore….

Just to digress for a moment, I will admit that when I first read this paper as an undergraduate I was deeply impressed by his introductory statement, but found much of the rest of the paper incomprehensible. Still awestruck by Friedman, who, I then believed, was the greatest economist alive, I attributed my inability to follow what he was saying to my own intellectual shortcomings. So I have to admit to taking a bit of satisfaction in now being able to demonstrate that Friedman literally did not know what he was talking about…

I think that Friedman’s paper has somewhat more coherence than David does. From Milton Friedman’s standpoint (and from John Maynard Keynes’s) you need microeconomic stability in order for private laissez-faire to be for the best in the best of possible worlds. Macroeconomic stability is:

1. stable and predictable paths for total spending, the price level, and interest rates; hence
2. a stable and predictable path for the velocity of money; hence
3. (1) then achieved by a stable and predictable path for the money stock; and
4. if (3) is secured by institutions, then expectations of (3) will generate the possibility of (1) and (2) so that if (3) is actually carried out then eppur si muove…

Now there are two different institutional setups that can produce (3):

1. a monetarist central bank committed to targeting a k% growth rate of the money stock via open-market operations; or
2. a gold standard in which a Humean price-specie flow mechanism leads inflating countries to lose and deflating countries to gain gold, tightly coupled to a banking system in which there is a reliable and stable money multiplier, and thus in which the money stock grows at the rate at which the world’s gold stock grows (plus the velocity trend).

Friedman calls (2) a “pure gold standard”. Anything else that claims to be a gold standard is and must be a “pseudo gold standard”. It might be a pseudo gold standard either because something disrupts the Humean price-specie flow mechanism–the “rules of the game” are not obeyed–so that deficit countries do not reliably lose and surplus countries do not reliably gain gold. It might be a pseudo gold standard because the money multiplier is not reliable and stable–because the banking system does not transparently and rapidly transmute a k% shift in the stock of gold into a k% shift in the money stock.

Or, in short, to Friedman a gold standard is only a real gold standard if it produces a path for the money stock that is a k% rule. Anything else is a pseudo gold standard.

The purpose of the paper, in short, is a Talmudic splitting-of-hairs. The point is to allow von Mises and Rueff and their not-so-deep-thinking latter-day followers (paging Paul Ryan! Paging Benn Steil! Paging Charles Koch! Paging Rand Paul!) to remain in their cloud-cuckoo-land of pledging allegiance to the gold standard as a golden calf while at the same time walling them off from and keeping them calm and supportive as the monetarist central bank does its job of keeping our fiat-money system stable by making Say’s Law true enough in practice.

As such, it succeeds admirably.

Or, at least, I think it does…

Have I just given an unconvincing Straussian reading of Friedman–that he knows what he is doing, and that what he is doing is leaving the theoretical husk to the fanatics von Mises and Rueff while keeping the rational kernel for himself, and making the point that a gold standard is a good monetary policy only if it turns out to mimic a good monetarist fiat-money standard policy? That his apparent confusion is simply a way of accomplishing those two tasks without splitting Mont Pelerin of the 1960s into yet more mutually-feuding camps?

Or was he simply, as David thinks, confused?

You decide…

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