Wikimedia Commons
You shall not crucify the economy on an idea from the dustbin of history. (Wikimedia Commons)

When it comes to crackpot economic ideas, the gold standard is, well, the gold standard.

It's a barbarous relic that has nothing to recommend it today. Pegging the dollar to the price of gold, you see, is just a doomsday device for turning recessions into depressions. That's because, as Paul Krugman points out, inflation-adjusted gold prices tend to go up when inflation-adjusted interest rates go down, and vice versa.

What does that matter? Well, think about it this way. Real rates are negative when nominal rates are high but inflation is higher still, or when inflation is low but nominal rates are lower still. Now in the first case, we'd want the Federal Reserve to raise rates to suffocate the economy until inflation is whipped. But in the second, we'd want it to keep rates as low as possible, and maybe even print money, to resuscitate growth. The gold standard, though, can't distinguish between this 1970s-style stagflation and 1930s-style collapse. It'd tell us to raise rates in both cases. And that's how you get a Great Depression instead of a Great Recession.

But libertarians of a certain bent, especially ones wearing bow ties, aren't worried about unemployment. They're worried about inflation. And, for all its flaws, the gold standard does have the very limited virtue of keeping the price level stable over the long, but not short, term. In other words, prices bounce around a lot from year to year—in fact, more than they do now—but it all eventually balances out to zero. So that's why the usual suspects of charlatans, cranks, and Zerohedge readers think the gold standard is the answer now matter what the economic question.

But now Peter Thiel, the billionaire co-founder of Paypal and the first investor in Facebook, has a new and incomprehensible defense of the gold standard. Just try to figure out what this means:

 

Where we’ve had progress in the world of bits but not in the world of atoms, and this world of bits, we’ve had progress in computers, Internet, mobile Internet. Technology just means information technology. It’s all about bits, but the world of atoms, space travel, energy like nuclear power, biotech, new medical devices, that’s been much slower, and there’s been much less progress in those areas in the last forty years. …

One’s been regulated, the other has not, but we’ve had this sort of dualistic world where the virtual world of bits has been growing very fast, but the real world of atoms has been kind of stagnant. And I think there’s a strange counterpoint where the same thing happened with our currency, where the real value of money became separate from the virtual in August of ’71 when we went off the gold standard. And so, you know, whatever you think of the gold standard, it had the virtue of connecting the real with the virtual.

 

This is some impressive gibberish, but I think I know what it means. Thiel might be saying that, under the gold standard, dollars and inflation-adjusted dollars used to be the same thing, but aren't anymore. If he is, he's wrong. Sure, the gold standard meant that inflation and deflation canceled each other out in the long run, but in the long run, you know, we're all dead. In the short run, meanwhile, the real value of the dollar could change a lot—which is why the Depression happened. Think about someone who borrowed money in, say, 1928. Well, five years later, wages had fallen so much that it was hard to pay back a loan that assumed wages would be flat. Or, in econospeak, the real value of money had increased, so the real value of debts had too. Mass bankruptcy was the result.

But there's an even more economically illiterate possibility here. Thiel might think that gold is the only "real" money, and everything else is just a representation of it. That's what Krugman calls the "Midas delusion": the belief that the one true measure of money isn't how many goods and services it can buy, but rather how much gold. This is just as nutty as it sounds. It's saying that the only way to measure our standard of living is by the price of gold, not by the price of the things we need to actually, you know, live.

The dustbin of history is there for a reason.