I find it ironic that some who like to think of themselves as “conservative patriots” are advocates of a system that would export the control of our nation’s money system to foreigners.
[This is article 1 of 3 in this week’s portion of my nonpartisan “Ironies” series, a diverse array of criticisms, distributed evenly and fairly among an inclusive list of ideologies—liberal, conservative, and nondenominational—to achieve my Diversity and Inclusion goals for 2007.]
Hey, I like gold coins just as much as the next person; they’re shiny, they don’t tarnish, the artwork is beautiful, and they just feel valuable sitting there in my hand. But that does not mean that I think the gold standard would be a good basis for our monetary system. I think it’s a really bad idea. That irritates some who think of themselves as conservative, or patriotic, or fiscally responsible—and there are more than a few politicians in that group.
Although I haven’t found many economists, of any ideology, who think the gold standard is a good idea for today’s economy, I have seen internet forum after internet forum packed with participants who do. Even though most economists understand both the economic inadvisability and the political impossibility of a return to the gold standard, that message hasn’t yet reached the status of common knowledge. With this article, I’m giving that message a boost, I hope.
I assume we can all agree that inflation is undesirable, regardless of what we’re using for “money”: paper, seashells, cows, cow patties, whale teeth, or gold coins. When it takes more “money” next year than this year to buy bread of equal quality (in equal supply and equal demand), “money” has lost some of its value. That’s inflation, and it’s undesirable because it means money is not maintaining a stable value for economic transactions. [By the same token, deflation is just as undesirable, for the very same reason.]
Money that maintains a stable, predictable value is the goal, because that eliminates one complicating variable for people exchanging real goods and services.
So what’s wrong with a dollar that’s tied to gold, instead of today’s dollar that’s tied to nothing but the federal government’s decree? After all, with mere “fiat money” won’t the government (as history has demonstrated) eventually turn up the printing presses to inflate its way out of the debt, or to gain the illusion of higher tax revenue without having to raise taxes? Wouldn’t tying the dollar to gold protect the value of the dollar?
Well, the best answer to that might be a thought experiment:
Assume we were on the gold standard today. What if science all of a sudden came up with a new technology that flooded the market with gold—say, a high-volume nanoscale process that extracted gold from seawater at a cost of a nickel per ton of gold?
Answer: That would be the gold equivalent of cranking up the printing presses and flooding the market with paper dollars.
Here’s how Dr. Rick Boettger chose to convey the same idea (in his book The Deficit Lie—one of the most entertaining economics books I’ve ever read and re-read):
Using gold to back up money is like using old poker chips to back up new ones. Gold is nothing but an old-fashioned form of money.
Now for a more-realistic angle on that same thought experiment:
Assume we were on the gold standard today—even though 90% of the world’s gold is produced by foreigners, and even though a significant portion of the known gold deposits are controlled by Russian and South African goldmine owners. What if the Russian, South African, and other goldmine owners, colluding with their political leaders, decided their countries could deal the US economy a big blow—thereby gaining a significant relative advantage in international trade and power—if they restricted or cutoff their gold production? How would our gold-standard economy respond to a “Gold Embargo”?
More importantly: Why expose our monetary system to the ups and downs and lags of world gold production? Why invite "monetary shocks" that would precipitate excessive inflations or deflationary recessions? Why not leave the control of our currency’s stability—our paper “fiat” currency—in the hands of Americans? Wouldn’t that be better than ceding control to Russian or South African goldmine owners? After all, as this Cato article pointed out:
...no country has ever been able to maintain a gold standard . . . gold's value [as money] derives from its long history as a store of value and is wrongly assumed to be intrinsic.
I’m with most economists: control of America’s monetary system belongs with Americans. Today, that’s the Fed Board of Governors. Hey, they aren’t perfect; they’ve made some pretty bad mistakes in the past. Not only that, but there are some people (e.g., see the Cato article above) who think the Fed’s job could be quasi-automated. Nonetheless, the Fed Board of Governors is in control now—and it is a group of Americans with a clear objective of keeping US dollar inflation low and under control.
Ironically, the gold standard is anti-American. Paper “fiat” money—money that’s money just because the government says it’s money and everybody accepts it as money—is better than gold.
I’m sure I’ll be hearing from Fed Conspiracy Theory fans about this post. If you know anyone who’s convinced the Fed is the result of a secret conspiracy by name-your-favorite-villains, then here are two papers you should tell them to read in full before they start submitting comments here: