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The gold standard, under which any holder of paper
dollars could redeem them for gold at the US Treasury, is now within the living
memory of just a few million Americans, nearly all of whom would be dangerous
behind the wheel. But thanks to the money printing and the federal deficits
that have grown to astounding scales since 2008, and thanks also to the
clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold
standard has resurfaced in the public's consciousness.
I'm happy to see the concept enjoying a revival.
Reading about it in the mainstream press and hearing it mentioned on the
cable news shows makes me feel a little less like a Martian. It has almost
made me feel avant-garde.
Despite my enjoyment of the revival, I've noticed that
the idea seldom is presented as a clear and definite proposal or as an
invitation to revisit an institution that worked well in the past. Too often,
it shows up as little more than a slogan or a taunt aimed at central bankers
or as just a political fashion statement. So let's take a closer look at what
it really means. It's not that complicated.
What Isn't at Stake
The abolition of the gold standard has been the source
of considerable mischief, but it hasn't been the source of all
mischief.
I've heard the lack of a gold standard indicted as part
of a government scheme to force the public to use paper money. It isn't.
The legal-tender laws are usually part of the story,
but the story doesn't hold up. Declaring irredeemable paper dollars to be
legal tender merely defines what a creditor may be forced to accept in
satisfaction of a debt that is denominated in dollars. Operating under that
regime is entirely voluntary; if you don't like it, you can avoid it by
declining to accept anyone's IOU or other promise denominated in dollars.
Despite the legal-tender laws that define what is a (paper)
dollar, you are free to buy and sell and enter into contracts without
using dollars.
The legal-tender laws amount to no more than the
government's claim that it owns "dollar" as a trademark that it can
apply to pieces of paper or to anything else it decides to – just as
General Motors owns the trademark "Chevy" and can apply it to any
piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers,
and you are free to eat one or not.
Any two parties are free to use gold coins (or silver
coins or strawberries) as a medium of exchange if they agree to. Pesos,
francs and Canadian dollars are permissible as well. A return to the gold
standard wouldn't alter that situation or expand the range of your choices.
I've also heard the lack of a gold standard blamed for
overall economic instability. Defenders of the current system of fiat money
do just the opposite – they blame the gold standard of the past for
preventing the Federal Reserve from stabilizing the economy. It's quite a
debate – little economic logic and much cherry picking from the big
tree of history. It all comes down to which system gets stuck with
responsibility for the Great Depression of the 1930s, which occurred at a
time when US citizens couldn't redeem dollars for gold (no
confidence-building gold standard to help the economy recover) but foreign
governments could redeem dollars for gold (that old gold standard, still
causing so much trouble).
What It Wouldn't Fix
A return to the gold standard wouldn't make you any
freer than you are now. You'd still be filing tax returns and still be
getting massage therapy from TSA employees; Congress wouldn't reform its
big-spending ways, it would merely switch from taking and wasting fiat money
to taking and wasting gold-backed money; and the Supreme Court, the guarantor
of your liberties, would continue making things up as it goes along.
A new gold standard wouldn't be an elixir of stability
for the economy. A severe depression in 1919-1920 demonstrated the Federal
Reserve's ability to engineer financial train wrecks even when the dollar is
redeemable for gold by anyone and everyone. And before the advent of the
Federal Reserve, the US Treasury demonstrated the same ability through its
borrowing operations, as did Congress on a few occasions simply by creating
uncertainty about possible changes in the monetary system.
And a return to a gold standard wouldn't ensure
long-term preservation of purchasing power for the dollar and
dollar-denominated obligations – because, as we've seen, a gold
standard adopted one day can be abandoned the next.
What It Would Fix
Now that we've dampened expectations, here's what a
gold standard would do: threaten the individuals who run monetary
institutions (such as the Federal Reserve) with embarrassment for bad behavior.
It narrows their opportunities for dodging responsibility.
Every issuer of money promises to protect its value.
The promise is the same whether it is made on behalf of a fiat currency or
for a currency backed by gold, silver, copper, other currencies or seashells
or pelts. A gold standard doesn't prevent an issuer from breaking the
promise. It merely makes it difficult for the issuer to pretend that it is
keeping the promise when year after year it isn't.
With a fiat money system, you don't need any special
talent in order to deceive the public with insincere talk about avoiding
inflation and protecting the money's purchasing power. The years-long lag
between printing and the effect on prices makes deception easy.
If you print more money this year, well, it's only a
temporary measure and only because of the recession you're trying to avoid.
Next year, you'll slow down the printing or maybe not print at all –
you'll have to wait and see what conditions are next year. And don't forget
to mention the odd years of rapid monetary growth that coincided with almost
no price inflation at all. And when price inflation does pick up, there's
always someone or something to blame – OPEC or terrible growing
conditions for the soybean crop in Brazil or a war. You'll think of
something.
Short of the complete destruction of a fiat currency,
there is nothing that can demonstrate beyond doubt the shallowness of the
promise to protect purchasing power that is being made on any day. There is
no bright line separating performance from talk.
With a gold standard, deception is much more difficult.
Creating too much money will lead to redemptions that drain away the official
gold stockpile. Everyone can see the inventory shrinking. If it shrinks to
zero, then the managers of the system have failed, period. There is no
ambiguity about it, and the politicians in charge at the time have little
room for denial.
The formal adoption of a gold standard holds no magic.
It's just another promise. But it is a promise that carries an assured
potential for egg-on-face political embarrassment if it is broken, and the
only way for the people in charge to avoid that embarrassment is to refrain
from recklessly expanding the supply of cash. That's why a gold standard
protects the value of a currency, and that is why the politicians don't want
it.
Terry Coxon is one of several big-picture analysts at Casey
Research who sift through today's cultural, political and economic trends
looking for clues as to when and how they might shift... because those shifts
hold strong profit potential for bold investors. To enjoy more articles like
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