Gold The Chastener

By Mark Rogers

“Gold provides a unique discipline because it cannot be created by banks. In a gold system, gold is the ultimate regulator.”

William Rees-Mogg makes this observation in his most recent column in The Times, Friday 20 July, 2012. It is such an important observation, that I have added it to my slowly growing arsenal of Maxims.

His article briefly discusses the financial scandals emerging in the City – the Libor crisis, HSBC money-laundering – in the context of two important matters: the wisdom or otherwise of the regulators and what caused the bankers to behave as they did.

The first concern is raised in the context of the forced sale by the Lloyds group of some 600 branches to the Co-operative bank. This sale was foisted on the group by the authorities of the European Union, in the belief that it would enhance competition within the sector, “although it undoubtedly creates another large bank, which may develop new control problems for managers and senior executives”. Was the Co-operative chosen because of some vaguely left-wing worthiness supposedly attaching to it? And if so, will the Co-operative prove more reliable than other banks simply because of it? We shall see.

Rees-Mogg’s second concern involves both bankers and regulators and he makes the inevitable point that both are to blame in varying degrees. It is slowly being acknowledged that the so-called “light-touch regulation” was nothing of the kind: it was wrong-headed, inexperienced and incompetent regulation, intervening in and micromanaging unnecessarily the day-to-day running of the City while ignoring or encouraging many of the things that ultimately blew up – and it may anyway have been politically directed (see here and here).

He certainly has no hesitation in pointing the finger at President Clinton as being the chief architect of the bubbles that burst, entering into an arrangement with Allen Greenspan at the Fed to prevent American markets from falling. “He wanted to live in a continuous boom.” So that’s where Gordon Brown got his ideas about an end to boom and bust from!

The long bull market at the end of the 1990s was the result, because Greenspan refused to let the market self-correct and, “in the absence of gold, the Fed faced no ultimate discipline”.

It is the fundamental point that Rees-Mogg goes on to make about gold that is the most fascinating aspect of his discussion. Gold, he maintains, imposed discipline on the banks for over three hundred years.

It may well be that it is this that leads many modern economists (together with their devotion to Keynes) to despise gold. After all, we may all get into a lather over misbehaving bankers – but they certainly prevent economics from becoming the dismal science. How much less exciting is the talk of discipline… Not for nothing did Keynes despise traditional morality, and was himself a notorious gambler!

“Keynes, the Cambridge wizard, cannot be a substitute for the discipline that has gone with gold.”

Unfortunately Rees-Mogg, in spite of knowing that gold, as well as being a discipline against incautious bankers, also “gave money its sense of reality”, ends his important article on a note of pessimism: he believes that such was the manner of the going of gold that the gold standard can never return – but see The Gold Standard Returns for a contrary view, and one, moreover, that goes into some detail as to how it may indeed make a return.

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GOLD THE CHASTENER was first posted on July 21, 2012 at 4:22 pm.
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