Fiat Money Fairytales

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Frequently one can tell by the title of an opinion piece whether it is going to consist of quality arguments or just meretricious mudslinging. Professor Charles Postel of San Francisco State University boldly announces the latter in choosing to title his recent tirade against sound money, Why Conservatives Spin Fairytales About the Gold Standard.²

Indeed, right from the start, the reader is presented with the following rhetorical feint:

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.

While acknowledging that the Fed is under attack from the left, he then proceeds to focus exclusively on debunking hard-money Fed criticism from the right, which is supposedly based on ‘fairytales’. While politics is largely if not entirely about fairytales, history shouldn’t be. As a historian, Mr Postel should know the difference. But as one reads further into the article it becomes clear either that he doesn’t, or that his anti-gold-standard agenda is best advanced by spinning fairytales of his own. For a start, he completely ignores the fact that elastic, fiat money is both what facilitated the bubble that caused the 2008 meltdown and what enabled the subsequent bank bailouts, neither of which would or could have occurred had the Fed been constrained by a fixed money supply.

REWRITING THE HISTORY OF THE FEDERAL RESERVE ACT

Moving farther back into history, Mr Postel writes the following fairytale about how the American public felt about the creation and early years of the Federal Reserve System:

In the years after 1913, the need for a flexible and regulated money supply was widely accepted across the political spectrum.

This is complete poppycock. First of all, the Federal Reserve Act was initially drafted in secrecy by a small group of elite Wall Street bankers and Senators on Jekyll Island, deliberately out of the public eye. Second, it was passed at the start of the Christmas holidays in 1913, with a large number of Representatives and Senators absent. In the Senate there were 43 'yeas’, 23 ‘nays’ and 27 absent (and more on the record as opposed than not). This hardly implies widespread support. Indeed, it suggests that the Act was conceived in secret and brought to a vote during holidays precisely because public opinion was opposed. Did this change dramatically in the following years? Well, given that the Fed did not begin to actively manage the money supply until the late 1920s, it is fallacious to argue that (non-existent) monetary activism was ‘widely accepted’ at this time.

(The eventual onset of Fed activism had its roots in WWI, which left the European economies devastated and led to a series of European currency devaluations and associated capital flight into the US, leaving the dollar by far the strongest currency in the world and contributing to a stock market bubble. By 1927, the ‘Roaring ‘20s’ were in full-swing in the dance halls and on Wall Street. But that was when the Federal Reserve finally became activist, goosing the financial markets with a jolt of easy money at the request of Great Britain, mired in recession as a result of Chancellor of the Exchequer Churchill’s horribly botched re-pegging of sterling to gold in 1925. The result, we know, was an investment boom which turned to bust in late 1929, a key contributing element to the Great Depression which followed.)

IS CHEAP FOOD A GOOD THING, OR BAD?

Mr Postel also highlights the prominent political debate about monetary policy that took place in the late 19th century. Indeed, monetary policy was such an important issue by the late 1800s that William Jennings Bryan famously won the 1896 Democratic nomination for president with his ‘Cross of Gold’ speech advocating inflationism.

Inflationism was popular with farmers, who were struggling to service debts they accumulated years earlier when grains prices were soaring due to the lingering inflationary effects of the Civil War. The introduction of mechanized agriculture put an end to rising crop prices as farm productivity soared. This innovation, arguably the greatest technological advancement in human history, enabled a more widespread industrial revolution through urbanization.

Mr Postel primarily blames the gold standard for the plight of indebted farmers at the time. That they suffered during this period is lamentable. But to 'blame' the gold standard for the breathtaking technological advancement, rapid economic growth and rising living standards in general that took place around the end of the 19th century is a bizarre rhetorical twist indicating an agenda.