Why conservatives spin fairytales about the gold standard

By Charles Postel
September 17, 2013

ILLUSTRATION: Matt Mahurin

The Federal Reserve is celebrating its 100th birthday trapped in a political bunker.

At few points since the Fed’s founding in 1913 has it taken such sustained fire. It’s taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.

Conservative or Tea Party Republicans have a different kind of criticism. They reject the notion that the Fed should even have the power to regulate the money supply and “debase” the dollar. They believe in hard money and a return to the gold standard.

These Republicans have taken a page from the book of conservative orthodoxies of the late 19th century. Conservatives are again fervently pushing gold as a means to protect the wealth and power of Wall Street financiers and the corporate elite. Conservatives are demanding hard money as part of the policy mix that enriches the top 1 percent. Now, as in the Gilded Age, the United States is a nation of savage inequality.

Hard money has often been linked to the conservative cause. But it has been more than 100 years since gold fever has so afflicted American politics.

The Federal Reserve Act of 1913 loosened the strings that bound U.S. currency to gold. Other ties were cut under President Franklin D. Roosevelt in 1933 and 1944. In 1971, President Richard M. Nixon severed the last tie between the dollar and the precious metal.

In the years after 1913, the need for a flexible and regulated money supply was widely accepted across the political spectrum. By mid-century, only a small band of right-wing ideologues clung firmly to the gold standard. In a 1990 paper, Milton Friedman, the 20th century’s most influential conservative economist, aptly described such holdouts as “monetary monomaniacs.”

But that was then. Today gold is king of conservative economic thinking.

Radio and TV personality Glenn Beck hawks gold coins as a business, and sells the gold standard as America’s salvation. President Ronald Reagan’s budget director, David Stockman, has written a 700-page jeremiad lamenting the departure from gold as the root of America’s “great deformation.” Financial magnate Steve Forbes has turned Forbes magazine into a tool of gold advocacy. And the conservative pundit William Kristol has now joined the chorus.

Meanwhile, Representatives Paul Broun (R-Ga.), Michele Bachmann (R-Minn.) and the congressional Tea Party Caucus are pushing to “audit the Fed” as the first step toward repeal of the Federal Reserve Act and restoring the gold standard. In the Senate, Senator Rand Paul (R-Ky.) is gaining support for a commission to study a return to a gold-backed currency. Republicans have also passed state laws in South Carolina and Utah, endorsing the use of gold as currency.

What explains this gold mania? The argument for gold is a tortured one. Supposedly it will save the country from the ravages of inflation. But inflation remains at historic lows, leaving many observers to note the dangers of a Japan-style deflation.

Supposedly, gold will provide an anchor of stability in a rough economic sea. But, like any other commodity, gold is subject to speculative bubbles. Over the last five years gold prices have been tossed high and low, more like froth in the wind than a sturdy anchor.

Supposedly, “ending the Fed” will return us to the firm ground of prosperity of the last gold standard era from 1873 to 1914. But claims that the old gold standard made for a more stable economy have no basis in the historical record. Those years witnessed the terrible depressions of the 1870s and 1890s, and some of the most severe financials busts and economic storms in U.S. history.

What the historical record does show is that the politics of gold and hard money bitterly divided the country and contributed to unprecedented levels of economic inequality. This experience helps make sense of the gold fever gripping conservatives today. Then, as now, hard money was the preferred policy of the corporate 1 percent.

Before the Civil War, state-chartered private banks issued paper bank notes. But these notes were notoriously unreliable. They were easy to counterfeit and often worth less than their face value. When issuing banks went belly-up, the holders of their notes were stuck with useless paper. Small wonder that working people favored hard coin.

During the Civil War the Union government printed paper dollars. They were known as “greenbacks” — for the color of the ink printed on the reverse side. The Treasury Department issued this paper or fiat money to pay soldiers and purchase supplies. Greenbacks would gain a wide acceptance — at least in the North — as the patriotic money that helped save the Union.

In the following years Congress took steps to put the U.S. currency on the gold standard. To replace greenbacks, silver coin and other currency, Congress favored gold-backed bank notes. These notes were issued by federally chartered private banks — most of which were clustered in the Northeast.

This move toward gold-based currency provoked a “battle of the standards.” Gold had strong support among the wealthy, including banking executives and conservative Republicans and Democrats mainly from Northeastern districts.

But many workers and farmers equated hard money with hard times. This perception grew stronger the further one lived from the financial centers of New York and Philadelphia.

By the 1870s and ‘80s, anti-monopolist leagues, the farmers’ Grange and the Knights of Labor fought back against the gold standard. Many of their members supported the Greenback Labor Party that stood for labor rights and greenback dollars.

This “battle of the standards” came to a head during the depression of the 1890s. A coalition of farm and labor groups had formed the Populist Party. Among other reforms, the Populists demanded an expansion of the money supply by minting silver and printing greenbacks.

William Jennings Bryan, a young former congressman from Nebraska, took up the cause of soft money at the 1896 Democratic National Convention in Chicago. Bryan, a powerful orator, was never a Populist — but he favored many of their reforms. He captured his party’s presidential nomination after he had convention delegates leaping on to their chairs with a speech decrying the crucifixion of humanity “on a cross of gold.”

Millions of hard-pressed farmers and workers passionately supported Bryan. Their experience with the gold standard helps explain why.

Hard money meant a general deflation of prices in relation to the dollar. Each year from 1875 to 1896, farm prices fell 3 percent. Georgia farmers saw the price of a pound of cotton fall from 10 cents to 5 cents. The price of Illinois wheat dropped even further. Corn prices fell so low that Nebraska farmers decided to burn it for fuel rather than spend money and time shipping it to market to sell it.

At the same time crop prices fell, the cost of mortgages and loans soared. Farmers needed credit for machinery and other supplies. But an unregulated credit market meant that in some regions loans were either sky high or not available.

If farmers could get a loan or a mortgage, hard money made it more expensive to pay off. When the real value of the dollar rose, the real value of their debts rose with it. Farmers had to sell a lot more wheat or corn to meet those debts.

Scarce credit combined with scarce dollars. Because the Eastern banks had a monopoly on issuing bank notes, farmers in the West and South often lacked access to currency. The lack of dollars in rural America became particularly acute after the growing season, when there was insufficient currency to move the harvest to market.

Farmers were not alone when it came to the burdens of hard money. During the long economic depressions of the 1870s and 1890s, workers and manufacturers felt the weight of the same deflationary price cycle. They asked why anyone would invest in an iron mill, for example, when the price per ton of iron stagnated or fell.

The gold standard alone could not explain the extent of farm poverty, or the depth of industrial crises. But many Americans understood that gold produced winners and losers.

Gold made losers of farmers and other working people selling goods at deflated prices. It made losers of people who paid mortgages and owed debts. And it made losers of those who lacked access to credit and currency.

But gold was good for those who controlled the currency, held gold or issued loans. It was good for the banking corporations, Wall Street financiers and other creditors. As a result, the gold standard shifted resources from the poor to the rich, and from the Midwest, West and South to the financial centers of the Northeast.

For millions of Americans, gold symbolized the power of wealth over the rest of the country. Along with corporate subsidies, regressive taxes and suppression of labor rights, the gold standard tilted the economy in favor of the top 1 percent, and opened a chasm between the rich and poor the likes of which the United States had never seen.

In the 1870s, anti-monopolists described the gold standard as a “relic of barbarism.” This was 50 years before the economist John Maynard Keynes said the same thing. What they meant was that the corporate elites who made such a fetish of gold relied on superstition and myth.

For the anti-monopolists, the gold standard was relic of a pre-modern age, unsuitable for a dynamic and expanding economy. Gold supplies, they noted, were limited by the random luck of the mining industry — and the even more random schemes of hoarders and speculators.

A modern economy, the anti-monopolists argued, required a more reliable currency. It also needed a more flexible money supply aligned to the growing needs of industry, agriculture and trade. This reliability and flexibility could only be assured by the powerful backing of the national government.

During the depression of the 1890s, the Populists were able to push their arguments into the center of national politics. They demanded a more flexible and reliable national currency — whether paper or silver, or a combination of the two — as a means to aid distressed farmers, stimulate commerce and create a more equitable and prosperous country. This demand for soft money found a voice in Bryan’s 1896 presidential campaign.

Conservatives from business, politics and academia rallied to the gold standard. They were known as gold bugs because of the militant faith that they placed on this precious metal as the key to preserve their wealth, power and way of life.

For Republican industrialist Mark Hanna, the political kingmaker behind President William McKinley, the danger lay in the “communistic spirit” of soft money. For Harvard economist Francis A. Walker, paper money would lead to “effeminacy” — weakening the control fathers and husbands had over their wives and children. For the journalist William Allen White, Bryan’s attack on the gold standard amounted to “riot, destruction and carnage.”

Bryan lost the 1896 election to McKinley. The Klondike gold strike that same year temporarily relieved the pressure of deflation. But the financial panic of 1907 unleashed renewed demands for monetary reform. Under President Woodrow Wilson, this led to the Federal Reserve Act of 1913 providing for financial regulation and a more flexible money supply.

Today, all modern economies have paper or fiat money backed by the power of government. And the possibility that the U.S. will revert to a gold-backed currency is little to none. The gold standard is a relic of history.

Yet, the cries of the “monetary monomaniacs” grow louder. Paul, Bachmann, Forbes, Beck and other conservatives now warn that it is either gold or the abyss.

They do so because today’s gold bugs share the same goals as their conservative ancestors. They, too, understand that hard money serves power and wealth.

Conservatives have put the Fed in their crosshairs. They are demanding hard money because it tilts the economic table in the direction of the haves and away from the have-nots. It favors banking corporations and Wall Street financiers. It squeezes homeowners paying mortgages and students with loans. And hard money is used as a justification for cuts in education, healthcare and other needs.

The Federal Reserve will be celebrating its 100th birthday with few friends and many enemies. It gained many of these enemies with its deregulatory policies that fueled speculation, enriched banking corporations and contributed to the financial meltdown. And it continues to make enemies with policies that favor Wall Street over Main Street.

But gold will not fix what is wrong with the Fed. Quite the opposite. Hard money is part of the conservative policy mix that has opened a chasm between the rich and poor the likes of which has not been seen since soon after the passage of the Federal Reserve Act a hundred years ago.

 

ILLUSTRATION: Matt Mahurin

PHOTO (Insert 1): Glenn Beck speaks during the National Rifle Association’s 139th annual meeting in Charlotte, North Carolina, May 15, 2010. REUTERS/Chris Keane

PHOTO (Insert 2): Senator Rand Paul (R-Ky.) speaking to the Faith & Freedom Coalition Road to Majority Conference Kickoff Luncheon in Washington, June 13, 2013. REUTERS/Gary Cameron

PHOTO (Insert 3): William Jennings Bryan, Democratic Party presidential candidate, October 3, 1896. Courtesy of LIBRARY OF CONGRESS

PHOTO (Insert 4): Mark Hanna. Courtesy of LIBRARY OF CONGRESS

31 comments

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@fazsha1: the author did not state that the gold standard caused wealth inequality, nor that the Fed era
abolished it. I’d love to get into a discussion about your ‘communistic screeds’ re: today’s debt levels and the inability to ever pay them back but you seem to also think that we have enough gold to back every dollar bill in circulation.

@COindependent: busy as usual I see. All good points
but how inflation is factored is tangentical to the
article’s subject.

@Hairry: You seem to imply that corporations are guilt free. Except corporations run Congress, who write laws in exchange for bribes. The prez is just the last hurdle in the legislative ‘process’. Exactly who pressed Congress to 86 regulation, so they could follow ‘predictable actions’, in your opinion? You don’t really believe that business ‘interests’ and the federal government can be separated at this point?

You also won’t acknowledge that Tea baggers are in the conservative realm of the spectrum. Agreed, they are fanatics but they certainly don’t fall under left/liberal or middle/moderate. Where do you propose to put them?

‘People’ latching onto the gold standard notion or
not isn’t colored by the educational system. A simple analogy using gun control should illustrate. Someone who finds Mr. Postal’s sound article troubling because he is an academic is mere finger pointing. What’s most troubling is your negativity given that you couldn’t even get a relevant survey of collegiate opinions on the gold standard. Well, I suppose ….

I’m mystified as to how you can extrapolate between the general populace and the college crowd. Or do you simply dislike academia in general and blame all academics and students for not agreeing with you out of hand? This is the only example I see of drone thinking.

Posted by Mac20nine | Report as abusive

@OneOfTheSheep: I’d suggest the Fed re: debasing the dollar, not Congress. I’d also relate you open up your eyes to the many having trouble finding work, not the ones cheating the system. They do exist, they are trying, they are not all watching television all day. You have read of the jobless recovery, outsourcing, age discrimination and weakness in manufacturing I take it?

I think you’re getting warm with your comment about not being able to plan for a future. If you can view the Recession as impacting those on the lowest rungs most harshly you might also be able to envision inserting ‘working class’ or for some, ‘unemployed’ wherever you see a ‘*’.

‘When * citizens CAN NOT PLAN a future with reasonable financial certainty and security they DO NOT HAVE a future worthy of preparation.’ Now think about the 50 year old machinist tossed on the street, as well as at least some of the urban poor re: ‘Nor the purpose or motivation to better themselves’. It’s hard to pick yourself up and re-train after a lifetime of honest work when your 401k’s tanked, your home is worth less or your pension gobbled up by “investors”. Or to go work a McJob while you figure out how to pivot and maybe your wife left you.

It’s hard for some that never got a decent education to better themselves when all most of them can reasonably hope for is working class jobs and what they’re becoming. When they can’t afford good education or training. Doesn’t excuse the cheaters but how many or the 8+% do you think are in desperate straits right now? If you think you’ve got it bad think about those hit even harder. How many kids whose parents REALLY need those food stamps? Both working full time and trying to find a solution? Maybe Dad should relocate to Nebraska.

‘When there is no certain reward for industry and effort beyond just that which allows the * exploited to survive’, due to how government and business is hollowing out the remaining dollars from the plebs, how do you think some people are going to react?

Posted by Mac20nine | Report as abusive

@Zotdoc: again, the author never stated that the gold standard caused wealth inequality.

Posted by Mac20nine | Report as abusive

I can hardly believe that anyone who knows what money is can think the gold standard is an option. This ties to so many issues it almost takes your breath away. I guess I just wish someone had mentioned “The Wizard of Oz” for the fun of it or bitcoin just to cause trouble.

Posted by notnews | Report as abusive

Mac20nine,

When the Fed does precisely what it must to facilitate sustaining the “status quo” (i.e. runaway spending without appropriate priorities) what difference is there of substance whether it is the Fed or Congress stealing the purchasing power of “we, the people”? Without AGREED priorities, there is no limit to the size of government or the amount it can and will take from us in taxes.
Mac20nine,

When the Fed does precisely what it must to facilitate sustaining the “status quo” (i.e. runaway spending without appropriate priorities) what difference is there of substance whether it is the Fed or Congress stealing the purchasing power of “we, the people”? Without AGREED priorities, there is no limit to the size of government or the amount it can and will take from us in taxes.

Either way it’s “our” government, but one in which the average citizen’s voice and interests are ignored. We “citizens” are right back where we were in 1776, subject to taxation without [meaningful] representation, accountability or limit. Yes, there are many, ,many “out there” in increasing financial trouble.

Some have lost “jobs”; and yet there is no such thing as a “job. There exists only an employer’s “need”, and such “needs” come and go and change with “progress” and as society changes. So there has ceased to be a “market” for that which some have to offer…like makers of buggy whips when automobiles replaced horses. Good for society, hell on the individual. No “right” No “wrong”. It is what it is.

Of those “on the bottom” of our economy, more than a few that make some half-hearted inquiries AFTER their unemployment runs out (after TWO YEARS!) then find an Esquire (attorney) to “wiggle” them on Social Security Disability and Medicare until they are old enough to collect regular Social Security. Sorry, I don’t view that as a “good faith” effort to be a productive member of our society.

The clock ticks without pause. The consequences of denial and procrastination are dire, so suck it up and “deal with it” (or not). Food and shelter are more easily available than through most of history. Everything else is optional. Make sure that sense of entitlement is the first thing tossed out the door. No one hungry and cold is “special”. Life gives those on the bottom few trophies.

Homes are lost when mortgages fall behind. Credit is lost if one blows it without prioritizing cash flow. Those who saved for a “rainy day” have more time and options than those who lived paycheck to paycheck. Those who act quickly and correctly suffer less in adversity than those who are overwhelmed.

All are NOT created equal in originality, flexibility or even risk assessment and mitigation. In the end we must each do what we can, where we are, with what we have. With little practice, few Americans are “good” at handling hard times. Who, precisely, promised life would be easy? It can be a real bitch at times.

Anyone who opens their eyes can see that our society needs fewer and fewer people to do what must be done. I have no idea what many younger people will do “for a living”. Businesses as we speak are revising their “needs” (positions) such that anyone warm and breathing that can read, write and do basic math at Junior High level can be contributing “100%” after a week or two of “on the job training”.

Hire only part time and employers pay no sick leave, overtime, continuing education, medical insurance and pensions. Such workers are as light bulbs. One fails, pop another in. No difference between them. No learning of skills, no advancement. Welcome to the future.

How do I think some people are going to react? With frustration and hostility towards anyone not suffering as they are. For those in the wrong place, things can and likely will get real nasty real quick. As the Boy Scouts say, be prepared (as best one can). Have a nice day, and please don’t kill the messenger.

Posted by OneOfTheSheep | Report as abusive

@Mac Do you think inflation reflects the purchasing power and value of the dollar over time? My position is that by allowing our government to continually pump dollars into the economy it debases the value of the dollar. And, by linking the dollar to gold (at some fixed rate–pick one say $800 ounce) would inhibit the expansion of the money supply without the associated economic growth, and thus underwriting the longer term purchasing power of a dollar.

Posted by COindependent | Report as abusive

@one of the sheep:

Generally I think you are correct about this.

I do think, however, that either people are a part of a certain community or they are not. If you exclude obligations to people from your community, you also exclude their obligations to you. If that is not so, then they are as much property as a cow. You take by right but do not give by obligation. That simply only happens with human property.

Also, people have the right to association, meaning they can be part of a community if they are welcome and so choose, or not. But obligations come with “rights”. You cannot have one when it is convenient and not have the other when it is inconvenient.

Actually, “toilet paper” money has been manipulated to benefit the rich, not the poor. The problem is that it is very difficult to trust any kind of banker, central or otherwise. Finding an honest politician with integrity is likewise hard to do.

Posted by usagadfly | Report as abusive

@usagadfly,

I’m greatly encouraged by your willingness to consider the truths all of us would change if we could. Some are truly cruel and unjust.

Being “part of a community” means accepting and conforming to the core beliefs of that community. The “community” is able to function because of MUTUAL commitment.

It seems to me the “debate” you advance is much like that of “which comes first, the chicken or the egg”. Fascinating, but of little practical significance. Let’s remove emotion from it.

If you are cold and have an empty wood stove, you can present infinite arguments to that stove why it should heat you before your blood flows sufficiently to go out in the cold and chop fuel to feed it. None will get you “heat in advance”. It is simple fact that you must get off your butt and go chop wood, bring it in and feed it to the stove before it can or will offer the warmth you desire.

In the same, sense, people must make individual decisions as to whether or not they will labor for the “common good”, because only AFTER they have done so and offered up the fruits of their labor does the “community comprised solely of such contributing individuals” have “community resources” to dispense. To such extent as they CHOOSE to distribute to those who have not contributed, they increasingly risk their ability to “take care of themselves” in “worse times”.

Some of those receiving unearned benefits will, instead of contributing back to the community that helped them, decide that they were entitled to the help received merely because they exist. Those will NEVER become “contributing members of the benevolent society.

Quite the contrary. If the benevolent society is democratic, it’s very benevolence creates a “counter-society” that, once a majority, can and will destroy it. Any presumptions as to the basic “good” of human nature sufficiently in conflict with Darwin’s “survival of the fittest” evidence place the long term survival of both you D your society at increasing risk.

So I think you have it backwards. Obligation (commitment) must precede “rights”. I do agree that “You cannot have one when it is convenient and not have the other when it is inconvenient.” But most of us also understand that we cannot give away that which we have not earned. Why can’t “our” government comprehend that simple immutable reality?

Posted by OneOfTheSheep | Report as abusive

The above analysis totally fails because it doesn’t recognize that the tea party rural and small town populists are angry because they(like working Democrats in the cities) have been ripped off by the financial sharks who control both the Republican party power structure and the current administration. Sure they lash out at liberals and socialists(does anyone actually know any?) and the usual targets in their brainwashed minds. But at heart this is a revolution against a Wall Street controlled dysfunctional government.

Anyone who believes that inflation is at a historic low hasn’t been buying his own necessities. We know from history that governments have for a variety of reasons become insolvent and debased metal and paper(or electronic) currencies. Gold has endured for use in currencies for many thousands of years because it is not easily duplicated. Of course governments have mixed cheaper metals in coins, and the latest innovation of the Wall Streeters is manipulating the nominal price of gold.

We are going through a doorway in history to a new future with a different power structure. The old powers are dysfunctional and not meeting our needs as a national community. Funny how the demand for physical gold endures no matter what the Wall Street paper price, whether you’re a tea party rancher or liberal school teacher, a Chinese father or an Indian mother.

Posted by rhess595 | Report as abusive

The article is simply twaddle. The purpose of the Federal Reserve System was, and still is, to centralize control over the economic activities of the United States and exert indirect control over the World economy through the agent of the U.S. dollar, and to ensure that that currency would be “elastic”, i.e., inflationary and made available to Wall Street and the Money-Center Banks in NY and Chicago whenever a run on the banks threatened.

The author is correct in stating that borrowers are disadvantaged by a hard currency which is resistant to money-inflation, and that a hard currency favours those who save and lend over those who borrow and spend, but absent the savers where would the borrowers obtain the funds to spend? It is also incorrect to state that a rate of inflation of 2% to 3% is low “historically”. Inflation at that level is low relative to the inflation rate experienced in the 1970s and 1980s, but it is high relative to the rate of inflation experienced in the 1960s and the 1990s and the early years of the present Century.

The author is incorrect in stating that following the establishment of the Federal Reserve System in 1913 that the gold was no longer in circulation. Until Nixon disavowed the ‘gold standard’, in order to prevent France from draining the gold reserves of the United States by redeeming inflated U.S. dollars for gold at the Treasury as required by law, the dollar was pegged to a fixed rate of exchange ($35 per oz.-Troy). Nixon’s move collapsed the Bretton Woods currency exchange arrangement and led directly to the inflationary period of the 1970s and 1980s. Volker’s move to quash inflation in the early 1980s through high interest rates crushed the economy and led to recession. The subsequent boom and bust economic fluctuations in the U.S. and World economies is directly tied to the alternating bouts of money-inflation and interest rate hikes that the Federal Reserve has imposed on the U.S., and through integration of the U.S. financial system with foreign financial centres, on the World economy at large.

Krugman’s hypotheses are largely bunkum. Inflation is a scourge in hand-maiden’s clothing. It led to the 2007-2008 financial system crash; and it will lead to an even deeper financial system correction when the latest Fed originated bout of inflationary money expansion terminates.

The FOMC’s recent statements give an inkling of just how poor the current U.S. economy is. But the FOMC is pushing on a string. Its QE-3 is of doubtful value. A proposal purportedly floated by Dr. Janet Yellen calling for the implementation of Fed policies of negative nominal interest rates will only drive the economy further into the ground. Fiscal and regulatory policies of Congress and the Whitehouse are having a strongly negative impact on the economy and employment. Under the combination of Federal Reserve inflationary money actions and politically dysfunctional fiscal and regulatory policies, the U.S., and indirectly the World, is facing a prolonged period of economic stagnation inflation — our old friend from the 1970s “stagflation”.

Posted by highlandlad | Report as abusive

Gold fluctuates in value. It is also easily manipulated since large holders can dump it on the market, wait for the ensuing panic, buy more after it tanks. Dump again. That’s how the price crank works.

So Why would gold be any more solid now than any other commodity? The whole notion of returning to the Gold standard is borne in ignorance and intellectual laziness.

Posted by AlkalineState | Report as abusive