Hating government while pining for gold
Gold? Why not bitcoins or conch shells?
A return to a gold standard makes perfect sense if your contempt for government runs so extreme that it trumps any consideration of consequences. As a practical matter, though, the idea of reinstating the gold standard lies somewhere between silly and perverse.
Yet passionate Republican stalwarts – including David A. Stockman, budget director under President Ronald Reagan, former presidential candidate Steve Forbes and former Representative Ron Paul of Texas – call for junking our dollar standard in favor of returning to a gold standard. The Republican Party’s national platform last year called for a commission to study a conversion to gold.
There’s also a new, fun money in town: a virtual currency known as bitcoins. Or consider conch shells: Societies from Africa to the South Pacific used seashells as money until well into the 19th century – though they wouldn’t fit well in modern pants pockets.
The common feature of using gold, bitcoins or seashells as money is that market forces – not government – would determine the amount in circulation. In the modern economy, the supply of money – the number of dollar bills chasing after goods and services – affects inflation and recession. If money pours into an economy, sellers will see higher demand for their goods. Expect them to raise prices and production in varying proportions.
Under our current dollar standard, our central bank, the Federal Reserve, controls how much money sloshes through the economy. Under a gold standard, the central bank loses control.
First, some basics. Economics 101 teaches us that money serves two key functions in society. We hold dollars because everyone else accepts them in exchange for goods and services (legal tender). We also hold dollars because they store value. We trust that the dollars we keep in our bank accounts will be worth about the same when we’re ready to use them to buy apples (fruit) and Apples (iPad). Said another way, we’ll hold dollars as a store of value if we expect inflation to remain tame.
The question, then, is: Who controls the production of money – who keeps the money sufficiently scarce that it retains its value?
Since the Fed controls the money supply, if it wants to increase the amount of money in the economy, it simply buys stuff, mostly government bonds, and credits the seller with a larger bank account. If the Fed wants to decrease the amount of money, it reverses course.
The point? A government institution rules the roost.
The gold standard, whose heyday extended from the last two decades of the 19th century until the outbreak of World War I, operated differently. The United States and other major countries set the price of gold in terms of local currency. Government stood ready and willing to exchange physical gold for dollars.
In the United States, the price was set originally at slightly more than $20 per ounce (later raised to $35 an ounce). Once the price was set, market forces, rather than a central bank, took over.
If, for example, miners struck new veins of the precious metal, physical gold would pour out of the mines and be exchanged for (new) dollars at the government-set price. New gold mines translated into more gold, which translated into more dollars, which translated into more spending – which translated into higher prices (aka, inflation) and production.
So what do we know about overall economic performance under gold-standard rules vs. Federal Reserve discretion?
Easy call. Under the gold standard, prices were less stable and crises more common – a financial crisis about every decade or two, according to Frederic S. Mishkin, professor of economics at Columbia University.
And was gold a good store of value? Hardly. Its price rises and falls in a haphazard pattern. In the 1980s, for example, the price of gold fell by half. At one point during the first decade or so of this century, the price rose sevenfold.
Worse – indeed, far worse – the rules of the gold standard, according to economics historian Peter Temin of the Massachusetts Institute of Technology, transformed an economic downturn in the early 1930s into the unspeakable disaster we call the Great Depression. Those rules led for complicated reasons to a collapse of the U.S. money supply at exactly the time that the economy needed lots more money.
Under severe economic pressure – America’s trading partners had begun redeeming unwanted dollars for gold, driving America’s stock of gold to alarmingly low levels – President Richard M. Nixon broke the legal link between gold and the dollar in 1971. That put the Fed in firmer control.
How’s government discretion working? Since the 1980s, monetary policy has keep inflation tame. Indeed, since 2008, inflation has fluctuated around 2 percent and never above 5 percent, an enviable store of value.
Here’s a startling fact: The business school at the University of Chicago hosts a survey of expert economists, academics from the country’s finest universities. Some are conservatives. Others are moderates. Still others are liberals. When asked whether they would support the return of a gold standard, 100 percent of the expert economists voted “no.” Economists are a notoriously unruly gang. I can think of no other policy that’s been greeted with such universal derision.
Those who see government as anywhere and everywhere incompetent and threatening will pine for gold to once again rule our lives. But those of us who face facts will rest happy knowing that the role that gold ingots play begins and ends with museum displays.
Right next to the seashells.
PHOTO (Top): American gold bars stand on display during a preview of “Gold”, a new exhibition dedicated to the highly prized mineral at the American Museum of Natural History in New York, November 15, 2006. REUTERS/Mike Segar
PHOTO (Insert A): Federal Reserve Chariman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington July 22, 2009. REUTERS/Kevin Lamarque
PHOTO (Insert B): William Jennings Bryan, three-time Democratic presidential nominee, electrified the 1896 Democratic convention with his “Cross of Gold” speech. LIBRARY OF CONGRESS.
PHOTO (Insert C): President Richard M. Nixon took the United States off the gold standard in 1971. WIKIMEDIA COMMONS