Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.
On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation? However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates, there would be little or no need for a minimum wage.
As the late Austrian economist Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940, prices in the United States actually fell on average from year to year,except during war years. Since 1940, the Federal Reserve, which became responsible for maintaining price stability and the value of the dollar through monetary policy, oversaw a decline in the dollar’s value of more than 93 percent. That calculates to a 1506 percent annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.
What was the difference between these two economic epochs in our nation’s history? The first had a gold standard and the second was based on a fiat dollar standard.
The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the gold standard would stabilize and eliminate the need for a minimum wage.
Article comments
— go to most recent comments1 - Igor
A return to the gold standard would impoverish Americans. It would mean that the same quantity of money would have to be used by a larger number of people, and so each would have less to work with. Almost certainly the bulk of money would collect in the hands of a small number of rich and powerful people. That's what happens in a country with money tied to a commodity. With less money among the masses they will become more desperate and inclined to violent revolution.
And what's so good about a "sound money policy"? And how would you recognize such a thing?
Moderate inflation is a good thing. It tends to drive money out of mattresses and into the economy, where it can work and pay wages. But inflation is hated by the very rich because it devalues their assets. On the other hand, ordinary mortals benefit from inflation because it diminishes their liabilities. Just ask any homeowner.
The problem is that our money system is schizophrenic: we have a fiscal policy that spends too much and taxes too little, so our balance sheet shows a deficit to be covered by borrowing. We try to control that by controlling interest rates at the Federal Reserve (monetary policy). But that can only work shortterm, not longterm. It's just a bandaid to buy a little time. Also, Fed policy has been perverted for many years by the rich (who control the bankers who sit on the Feds board, exclusively) to control inflation, which is not in it's charter. Nevertheless, everyone will tell you that the Feds holy purpose is to control inflation.
So what happens is that the inflation forces pumped into the fiscal system, by having too few taxes to cover spending, we attempt to subdue with fed interest rates, which can only work shortterm. Then the dam bursts.
The perfect example of the wrong way is the Bush administration which cut taxes while increasing spending (two trillion dollar wars) thus increasing the debt, for no good reason. So they crankes in big inflationary forces, which we are starting to feel now.
2 - Kenn Jacobine
Look at 19th Century America, we had a Gold Standard and no violent revolutions.
The Market would dictate the supply of gold and thus money. I trust the Market infinitely more than the price fixers at the Fed.
3 - Dr Dreadful
Look at 19th Century America, we had a Gold Standard and no violent revolutions.
Really, Kenn? Really?
Numerous Latin American countries were on the gold standard during the 19th century as well, and they had no shortage of violent revolutions.
Add to that the historical truth that the English-speaking peoples aren't all that strongly inclined to revolt violently anyway.
What is it that they say about correlation and causation?
4 - El Bicho
"Look at 19th Century America, we had a Gold Standard and no violent revolutions."
The U.S. Civil War wasn't a violent revolution?
5 - Kenn Jacobine
I, of course, am talking about the United States not Latin America.
The War Between the States was not a violent revolution. The Confederate States broke away peacefully. It was Lincoln who started the violence.
6 - Dr Dreadful
Kenn... Come back to your home universe, Kenn, we forgive you!
1. The first shots fired in the Civil War were by the Confederacy, at the merchant ship Star of the West which was attempting to resupply the garrison at Fort Sumter.
2. Lincoln was not President at the time: Buchanan was.
7 - Dr Dreadful
I, of course, am talking about the United States not Latin America.
Then your argument is even more feeble. You claim causation, yet exclude any possible test.
8 - Cannonshop
#5 Kenn, hate to contradict you, but the late unpleasantness between states (1860-1865) was interesting, in part, BECAUSE THE CONFEDERATES ATTACKED BEFORE THEY WERE READY FOR WAR.
(at least, before preparing for a war of more than a few months, fought in the summer, between disinterested gentlemen).
Up until the shore batteries opened fire in the Sumter incident, there was no strong cassus belli for the Union to pursue an aggressive campaign, and had they not done so, the political winds of the time would likely have seen the Confederate States a great deal MORE time before the remnant of the Union was ready (as in 'willing') to fight them.
The Sumter seige changed the dynamic-it provided legal reason for Lincoln to act, where, prior to that, all he could really do was send strongly worded notes.
9 - Igor
5-Kenn: OMG!
"The War Between the States was not a violent revolution."
10 - Kenn Jacobine
South Carolina had left the union peaceably and was attempting to negotiate the return of its territory - Fort Sumter from the federal government. In the meantime, the Union resupplied it and Washington issued an order to effectively blockade Charleston Harbor. That is why the Star of the West was fired upon - in self defense of South Carolina' sovereignty. Funny how our government is doing the same thing to Iran today, but I digress.
The original point was that Igor said a return to the Gold Standard would make the U.S. "inclined to violent revolt". The fact is that the U.S. was on the Gold Standard for a large portion of our history and we experienced no violent revolts on account of it.
11 - Igor
IMO, Lincoln should have forcefully kicked the Southern slave states out of the union. Later, they would have been begging back in. The net benefit would be that we wouldn't have the last 150 years of vengeance exacted on the US by those !@#^ southern slave states.
12 - Dr Dreadful
South Carolina was "negotiating" the return of Fort Sumter by threatening to open fire on it if the US garrison didn't leave.
Anderson's occupation of Sumter was at worst provocation and it certainly wasn't violent.
13 - Dr Dreadful
The original point was that Igor said a return to the Gold Standard would make the U.S. "inclined to violent revolt".
Yes, and he explained the reasons why he thinks it would. You, on the other hand, gave us absolutely nothing to support your claim that it wouldn't.
The fact is that the U.S. was on the Gold Standard for a large portion of our history and we experienced no violent revolts on account of it.
Still feeble. The conditions in 21st century America are not the same as those in 19th century America.
One might as well argue that because the climate warmed in the past without industrial activity, the same thing is happening now.
Oh wait...
14 - Kenn Jacobine
Dr
Igor or you have not proven that the Gold Standard would incite violent revolution in America. He was hypothesizing about what the future could hold with a Gold Standard based on no historical experience or any facts. It was merely his opinion. You will defend Keynesianism right to the end because its ultimate demise is shattering your entire world. Give it up and stop defending ridiculous, non-sensical anti-free market posts. It is an insult to a knowledgable person when you attempt to pass such dribble.
15 - Glenn Contrarian
Kenn -
What you're missing - and what you'll refuse to accept to the very same extent that you're accusing Igor of defending Keynesianism - is that reverting to the gold standard would destroy - repeat, destroy - our economy.
Why? Because it would force the prices of electronics - almost ALL electronics - to skyrocket. From geology.com:
Uses of Gold in Electronics
The most important industrial use of gold is in the manufacture of electronics. Solid state electronic devices use very low voltages and currents which are easily interrupted by corrosion or tarnish at the contact points. Gold is the highly efficient conductor that can carry these tiny currents and remain free of corrosion. Electronic components made with gold are highly reliable. Gold is used in connectors, switch and relay contacts, soldered joints, connecting wires and connection strips.
A small amount of gold is used in almost every sophisticated electronic device. This includes: cell phones, calculators, personal digital assistants, global positioning system units and other small electronic devices. Most large electronic appliances such as television sets also contain gold.
One challenge with the use of gold in very small quantities in very small devices is loss of the metal from society. Nearly one billion cell phones are produced each year and most of them contain about fifty cents worth of gold. Their average lifetime is under two years and very few are currently recycled. Although the amount of gold is small in each device, their enormous numbers translate into a lot of unrecycled gold.
Use of Gold in Computers
Gold is used in many places in the standard desktop or laptop computer. The rapid and accurate transmission of digital information through the computer and from one component to another requires an efficient and reliable conductor. Gold meets these requirements better than any other metal. The importance of high quality and reliable performance justifies the high cost.
Edge connectors used to mount microprocessor and memory chips onto the motherboard and the plug-and-socket connectors used to attach cables all contain gold. The gold in these components is generally electroplated onto other metals and alloyed with small amounts of nickel or cobalt to increase durability.
Now what's the likelihood that you'll realize your error and stop drinking the gold-standard Kool-Aid? I'm guessing it's zero, because as far as I've seen - to paraphrase your words to Igor - you will defend libertarianism and gold-standard idiocy right to the end despite the wealth of evidence showing that austerity NEVER brings growth, and that every business for which computers and other electronics is crucial would face a hideous - and entirely unnecessary - financial burden just so you can have your precious gold standard back.
16 - Jordan Richardson
Kenn, you have been indoctrinated to the point that it's impossible to take you seriously. The stuff you've tried to sell in this thread is beyond belief, yet you have the audacity to claim you've got anything to do with "knowledgeable people." You couldn't even get your elementary history right, yet you're an "international educator currently teaching history?" Ouch.
17 - Kenn Jacobine
Glenn,
The price of gold is high right now because the dollar is so weak against it (because of Keynesian spending and Fed polices). What you fail to realize is if the dollar is backed by gold its value will increase and inversely the price of gold will come down for things like jewelry and electroncs. Your argument is precisely why the dollar should be backed by gold because it is valuable in industrial uses. It would give stability to the dollar infinitely more than the backing of Uncle Scam.
18 - Kenn Jacobine
Jordan, can't provide anything intelligent so we have to revert to personal attack?
19 - Jordan Richardson
Yep. All you do is state and restate your opinion, regardless of facts to the contrary, so what's the point in trying to muster up something "intelligent?" You've set the bar mighty low, IMO.
Also, who's "we?"
20 - Glenn Contrarian
Kenn -
Are you stoned? I mean, seriously, are you stoned? What would happen if the world's largest economy went back on the gold standard? Let me ask in a different way - what happens to the price of a thing when the demand of of that thing skyrockets? Hm?
Ah, but I forgot - you also think it would have been better to let GM die and be sold off at fire sale prices rather than to use a taxpayer-financed LOAN - not a bailout, but a LOAN which has since been mostly paid off on GM's path to the profitability she now has (not to mention the hundreds of thousands of jobs that were preserved as a direct result).
No, Kenn - if we went back on the gold standard, every idiot and his brother would start exchanging dollars for gold. The demand for gold bullion would skyrocket, and so would the prices of all electronics wherein gold is an essential component.
But of course you can't believe that. Go on and keep drinking that Kool-Aid, y'hear?
21 - Kenn Jacobine
Glenn,
First of all, it doesn't matter if it is a loan or grant money - GM was bailed out. The government only bought time for GM. When the next crisis comes GM will be back for more money. BTW - the price of its stock has to go to $56 a share for Uncle Scam to get His money back. I checked this morning - GM stock is at $27 a share! So investors don't have the same confidence that you and Uncle Scam have in GM.
I am stoned?? You don't realize that gold has skyrocketed because the dollar is not linked to it. I have bought gold to get rid of what will become worthless paper. If that paper is backed by gold and the Fed stops inflating the money supply I would sell my gold because I would know that I could redeem my paper for gold at any time. But I probably would not have to because the value of the dollar would stabilize. That is the whole point. You statists think you are helping the poor by inflating the currency to pay for all of your schemes but what you are doing is hurting the poor through price inflation. the Gold Standard corrects that.
In 1964 there was about 14 percent poverty in America. After over 4 decades of spending and inflating trillions we still have poverty at about 14 percent of the population. Your programs and monetary system do not work. The free market is unrivaled for producing prosperity and alleviating poverty. That's a historical fact.
22 - zingzing
kenn, so in 1964 there was a 14% poverty rate and later there was a 14% poverty rate. if your numbers are correct, what are you trying to suggest?
"poverty" is a moving line, and probably should be adjusted to the bottom portion of economic reality, but i'm wondering what it is you're trying to say.
beyond that, returning to the gold standard, like returning to the 19th century, probably wouldn't have the effect you're looking for in the 21st century. i dunno, it may. but i kinda doubt that you apply it with impunity.
23 - Glenn Contrarian
Kenn -
First of all, it doesn't matter if it is a loan or grant money - GM was bailed out. The government only bought time for GM. When the next crisis comes GM will be back for more money.
And since it was a loan, it effectively cost the taxpayer close to ZERO dollars...and in between now and the next supply-side crisis, hundreds of thousands of people have jobs that they wouldn't have had otherwise, and the government receives tax revenue that it wouldn't have received otherwise - all for the price of making a sizable loan that has been mostly paid back.
But I see what you're saying - better to let hundreds of thousands of people lose their jobs, better to allow tens of thousands of families fall below the poverty line and depend on welfare, than to LOAN the company one freakin' dollar in order to get it through a particularly rough patch.
Kenn, you're relying totally upon idealism rather than pragmatism - and as an historian, you should know better than that.
The free market is unrivaled for producing prosperity and alleviating poverty. That's a historical fact.
Unrivaled, hm? Last I recall, ALL the oh-so-socialist first-world nations (outside the oil-rich Middle East) have a pretty low poverty rate (even considering the current economic problems) when compared to nations where the mostly-unregulated free market reigns supreme - such as China and India.
You claim you'd turn in your gold for paper if we went to the gold standard...and you're assuming that most other people would do the same. You're assuming that the world market wouldn't panic when the U.S. and not the rest of the world shifted to the gold standard...and you're assuming that the economic turmoil in the rest of the world wouldn't hurt the American economy at all - despite how in the past few years our markets here were roiled by events in nations as small as Greece and Iceland.
Kenn, you don't have facts on your side. You've got assumptions based on ideology, but not facts...and you're willing to bet the world's economy that you're right and most everyone else is wrong.
24 - Christopher Rose
I'm puzzled as to why people who are worried about fiat currency always turn to gold.
The theory seems to be that if the shit hits the fan, gold will be an effective store of value. What I don't get is, in that awful scenario, who would accept gold as payment for anything?
The last thing I'd want in a crisis is to be carrying around large lumps of a heavy metal. Surely a system of barter is what would replace a currency collapse?
25 - Glenn Contrarian
Chris -
When everything goes straight down the toilet (like in the Weimar Republic), gold (and precious stones and jewelry and such) suddenly become incredibly valuable. What the world did by getting off the gold standard was to essentially level the playing field - otherwise major gold-producers like South Africa would be much stronger economically speaking, perhaps even becoming gold's equivalent of the Middle East. That, and getting off the gold standard enabled electronics to be made much more cheaply than before, because when gold was the standard, it behooved every nation to hoard as much of it as possible to protect their own economic viability.
But Kenn - and most other libertarians - can't see past their own idealism to accept the pragmatism (and the sheer good sense) of getting off the gold standard.