The United States embraced the principle of a gold
standard – a dollar whose value was linked to a defined quantity of gold –
from 1789 to 1971, a stretch of 182 years. During this time, the U.S. was the
most successful of any major country, expanding from thirteen war-ravaged
states along the Atlantic seaboard to a world economic superpower, with the
broadest and wealthiest middle class the world had ever seen. The U.S. dollar
was the premier international currency, and New York was the world’s
financial capital.
If the U.S.’s gold standard policy was a mistake, as
nearly all academic economists claim today, shouldn’t there have been some
evidence of that, after nearly two centuries? Shouldn’t there have been some
kind of negative consequences? Shouldn’t there have been some other
government, somewhere, that did even better, with a different approach?
The last twenty years of this period – the Bretton Woods
era of the 1950s and 1960s, when the dollar was worth 1/35th of an
ounce of gold – was the most prosperous time of the last century, not only in
the U.S., but around the world. Nobody wanted the good times to end. There
was never an international conference where governments agreed to adopt a new
world monetary system. When President Richard Nixon “closed the gold window”
on August 15, 1971, he said it would be a temporary measure. And indeed it
was: Nixon himself organized the Smithsonian Agreement a few months later, in
which world governments earnestly cooperated to restore the Bretton Woods
framework of fixed exchange rates, and refix the dollar to gold at $38/oz.
But, they didn’t know how.
The immediate result was an economic disaster – the
“stagflation” of the 1970s. Considerable recovery was achieved during the
“Great Moderation” of the 1980s and 1990s, when the dollar’s value was held
around $350/oz. of gold – by intent or by accident, a crude gold standard
system. (Alan Greenspan, who presided over much of this time at the Federal
Reserve, has hinted rather heavily that this was on purpose.) After 2000, the
dollar’s value declined again vs. gold, from around $300/oz. to a nadir near
$1900/oz., and then bounced around rather turbulently. Another era of
stagnation and disappointment, accompanied by a serial rotation of strange
“asset bubbles,” was the result.
Paul Krugman, on the Left, once called this post-1971
experience the “Age of Diminished Expectations.” Tyler
Cowen, on the Right, called it the “Great Stagnation.” If
floating-currency chaos and macroeconomic manipulation by central banks was
such a brilliant innovation, shouldn’t there be some evidence of that, after
forty-six years?
Even today, the American people can still tell the
difference between success and failure. A 2011 poll found that 57% of voters would favor a gold
standard system if “it would reduce the power of bankers and political
leaders to steer the economy.” Only 19% opposed.
Forget all the silly claims that humanity’s long
affinity for gold-based money is due to some kind of “superstition,” “mania,”
obsession,” or “fetish.” Economic thinkers have long known that the best
money is money that is stable in value, in much the same way as other weights
and measures, such as grams, meters or minutes, also remain fixed and
unchanging. “The one essential quality that is needed in the article which we
use as a basis for exchanging all others is fixity of value,” Andrew Carnegie
explained in 1891, repeating what had been conventional wisdom for centuries.
The market economy’s basic processes require a stable monetary unit. When
the price of oil goes up, more investment and production may follow, while
users may reduce their consumption. This is a beneficial and productive response
if it is due to real changes in the supply and demand of oil; and a
nonsensical or destructive response if it is caused by changes in the money.
As described in insight-laden detail by George Gilder in The Scandal of Money (2016),
money acts as a sort of information system for the economy. The economy is
guided by the economic “signals” of prices, profit margins, interest rates
and returns on capital. The “noise” of the carrier – the money – must be as
little as possible.
The gold link produced this necessary stability. Its
imperfections were minor enough that they didn’t matter very much. Nobody has
found a better way. Mostly, they didn’t feel the need to look for one.
The International Monetary Fund categorizes roughly
two-thirds of all countries today as having some sort of fixed-value
arrangement, mostly linked to the dollar or euro. In doing so, governments
mostly, or completely, give up domestic macroeconomic management via currency
distortion. The main difference between a “dollar bloc” and a “gold bloc” is
the choice of the standard of value.
The best way to achieve this fixed-value link is with
some sort of automatic system similar to today’s currency boards. In
practice, currency boards are highly reliable, and are not prone to the kinds
of disasters that “pegged” systems suffer constantly – including the
disintegration of Bretton Woods’ $35/oz. gold “peg.” This is critical knowledge that will enable us
to avoid that traumatic outcome, and instead create the kind of quiet
reliability that the British pound enjoyed for more than two centuries before
1914.
Governments should still be ambitious about managing the
domestic macroeconomy–but not through monetary distortion. Tax reform,
regulatory reform, educational reform, welfare reform, abundant capital
creation, and a dozen other advances promise the kind of fundamental and
lasting improvements that monetary manipulation can never provide. You can’t
money-twiddle your way to prosperity. No country ever has. Haven’t
we learned this by now?
(This item originally appeared at Forbes.com
on November 15, 2017.)
