ORIGINAL PUBLICATION, SEPTEMBER 8, 2015
REVISED, SUBSTANTIALLY UPDATED AND REPUBLISHED, OCTOBER 31, 2016
Since first publishing the following composition I embarked on further, and exhaustive, study related to the history of money, banking and the gold standard. If you are coming to the topic of a gold standard for the first time, or have studied it yourself, my hope is that you will realize, as I have, that common memes surrounding the subject matter like, “the gold standard failed”, are deplete of historical evidence and run counter to the superiority of market-based over state-run economies. Likewise, calls for a gold standard, which by default requires a government or authoritative body to police, incorporates the very same seed that destroyed the gold standard, and every other form of money that has ever failed, in the first place, government.
Myself, I have been finding it more helpful to think in terms of a gold standard vs a fiat gold standard, or a gold standard established and managed by a central authority. It historically has been fiat gold standards that have failed. A straight gold standard, free of government intervention and regulation, would work like the supply of any other good on an open and free market. Supply and demand would determine price and, in the case of money, drive all prices relative to gold money. The periodic “disturbances” through new discovery and innovations in extraction, often pointed to by those critical of a gold standard, are no different than weather patterns or innovations in planting and harvesting impacting crop prices. These certainly are “imperfections”, though nothing in this world is perfect. It is the governments attempt to wring out these supposed imperfections that leads to what I would estimate well in excess of 90% of all historical price disturbances and imbalances. Agriculture and money are no different in this regard.
If a pure gold standard, brought about through a process of voluntary consumer adoption, was left to its devices, it would certainly be far more beneficial to the users of gold money than a fiat gold standard or, for that matter, the fiat paper standard we currently operate under. To take any other position would accept that mercantilism, socialism, fascism, government price controls and state planned and controlled supply and monopolization of goods offers better outcomes to consumers than free market mechanisms. I cannot make that leap. My hope would not be to see a fiat-declared gold standard, for the same reason I do not wish to see a fiat-declared bread standard. If consumers and certain banking and non-banking institutions wish to adopt a gold standard, so be it. But, if others wished to adopt a silver standard, others a commodity basket standard, others a Bitcoin standard, etc., etc., they should be permitted to do so as well. So, I support free competition in money and banking, not a gold standard through government dictate.
The text that follows is, for the most part, original. The conclusions have evolved to incorporate the evolution of my thoughts as described above.
Should we go back to a gold standard? First, gold and other precious metals have been used as money for millennia. As I refer to “the” gold standard in this piece, I refer to the gold standard that was originally established by Britain in 1821, and then ultimately adopted by many other countries, including the United States in 1873. Over approximately 150 years various forms of a gold standard, which were in truth not really gold standards at all, existed but it was ultimately abandoned in 1973. Most writings on this subject matter approach it from one of two angles; one, gold supply was subject to wide gyrations, market forces and often left government officials unable to manage the supply of money for the public good or, two, gold, in terms of stability was far superior to the fiat paper standard we currently live with and that it is exactly the ability of a gold standard to neuter government that is its greatest strength. I fall in to the latter camp. Unfortunately, gold was not able to stand up to political forces which is why I support a market-based approach to money and banking where consumers drive entrepreneurs to produce money with qualities and features they demand. You can read about the history of the gold standard (here, here, and here). Obviously, there are many other resources as well. There is, no doubt, some bias built in to each writing on the history of anything, and the gold standard is no different. My hope, here, is that the information I provide can assist you in developing an informed opinion. As stated, the United States went off the Gold Standard completely over a period of time in the early 1970’s and the question is, should we go back?
Supporters of a gold (commodity-based) standard refer to the actual commodity itself, gold, silver, copper, etc. as the money. Currency, they define as somewhat of a claim-check. For example, you go to a restaurant, you give them your jacket to store in the back, they give you a claim-check, and you proceed to be seated for dinner. When you are done, you hand the restaurant your claim-check, they give you your jacket back, and off you go. In this example, your jacket is the money, or gold, the claim-check is the currency. In general, this is the way a gold standard would work. But, what if the restaurant took all the jackets? Or, alternatively, what if the restaurant sold your jacket multiple times to other customers such that there were far more claims to jackets, than jackets? People did not, and would not want to carry around gold, they would want to carry around claims to gold, currency. The problem for governments who hold a monopoly over the production of money under this type of system is that they are unable to control their desire to expand the supply of claim-checks, currency, relative to jackets, money. When the US went off the gold standard, the currency retained the name of money despite there being no gold (money) backing the currency. Now, if the restaurant told you the claim-check you possessed was as good as your jacket, you would know right away you had been taken. The theft of the public’s money, however, was imperceptible.
THE GOLD INDUSTRY
The way I see it, there are, theoretically, two camps that might promote gold, or the use of a gold standard; 1) gold miners, sell-side gold “analysts”, dealers and brokers (the gold industry) and 2) sound-money advocates. The first group, who more promote gold as an alternative to fiat currency and not its use as a unit of money, might be great people, but they are hardly in an unbiased position with respect to gold. I carefully examine the claims and opinions of a gold dealer the same as I do a car dealer, or a real estate agent, or a stock broker, or anybody else trying to sell me something. The gold industry may, or may not, benefit from a gold standard. If the government fixed the price of gold at a price below the cost to pull it out of the ground, they would not be a very happy group. If the government showed up at the mines with guns forcing them to pull it out of the ground at a loss, I imagine they would be even less excited about the prospect of a gold standard. In fact, the same way we would see a decline in the sale of firearms if Second Amendment rights were not in peril, I believe the evidence would support an actual decline in gold production if we were to return to a gold standard or market-based approach to money.
The truth is that if you approached the average person and explained to them that there is something wrong with the money in their wallet they would think you were losing it. They go to the grocery store to buy food, no problem, pay their debts, no problem there either and Uncle Sam accepts it so, what’s the rub? The rub is that same dollar, since 1913, has lost over 99% of its purchasing power in terms of consumer goods. Further, and connected to the loss in purchasing power, that same dollar enables our federal government to tax and spend our production without us realizing it. As public policy, sound-money advocates promote the gold standard to protect citizens from further losses in purchasing power and the squandering of resources through government profligate spending . What I find somewhat ironic, though, about this group, is that they are often investors in gold and advocates for balanced budgets and limited spending by government, at the same time. If you are in investor in gold, it is counter-productive to advocate balanced budgets and limited government spending, If you invest in gold, you should be hoping for rampant government spending and hyperinflation, but that is a topic for another time. For now, I believe it is most important to examine the reasons, cited by the advocates of sound money, why gold should be money.
THE GOLD STANDARD
There is no higher authority on sound money than Ludwig von Mises. He was the acknowledged leader of Austrian Economic Theory, and is the namesake of the Mises Institute. The following statement is excerpted from Chapter 21 of The Theory of Money and Credit, authored by Mises.
“The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money. Viewed in this light, the gold standard appears as an indispensable implement of the body of constitutional guarantees that make the system of representative government function.”
Let’s take each point separately:
“The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties.”
In a pure, non-fiat, gold standard built on a foundation of a free and open gold market, government and banks would need to compete with other buyers and sellers and the ultimate price of gold would be based on the market, not government policies. In this case, money would need to be denominated in grains or ounces (for example, 1/16, 1/8, 1/4, 1/2 and 1 ounce, etc.), or, fixed currency units (dollars in the US) would have to be redeemable “at the current (gold) price”. So, in the US, if I had an ounce of gold money, and deposited it in to a bank, in exchange for dollar currency units, and then returned one month later to redeem my dollars for gold, the amount gold I received back would be the same, plus interest perhaps, but its value compared to a fixed currency unit or other goods might be quite different. In appearance, again for the average person, this is not much different than what happens today. What is much less visible, and the difference, is that in a pure market-based gold standard, fluctuations are driven by supply and demand forces, not government intervention. That is not, however, how it worked under the gold standard prevalent in the 19th and early 20th centuries, and referenced here to fore, time periods often referenced by sound-money advocates. During that time period, government fixed the rate at which currency and bank deposit holders could request a redemption of gold. While fixing the price of anything, from an economic standpoint, is not a sound practice, it was this mechanism that was supposed to, and effectively would if adhered to, hold both banks and governments in check.
“Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies.”
Here, we must be more specific. What Mises was eluding to was a gold standard with fixed redeemability outside the reach of government, say a Constitutional amendment. So, why was it that a free-market promoter like Mises was advocating for price fixing? Monopoly. The reason for fixed-price redemption was that government had a monopoly over the monetization of gold and closely controlled and regulated the banking system. It was simply a second-best solution, or attempt, to prevent a monopoly producer from exploiting its position of privilege. A market-based money system, like a market-based approach to supply food and clothing, for example, would be the superior method of supplying money to consumers and would offer no privilege to rulers, well-intentioned or malevolent. No form of fiat gold standard with fixed-price redemption was ever able to shackle politicians, government and/or their bureaucrats. If it could, I still fail to see how market forces could be inferior to state-run monopolies. The historical evidence should be clear to everyone on this by now. Government involvement in the gold standard, and money in general, is the cause of failure, and nothing else.
Here is a quote from Milton Friedman to drive home the point on this issue and lead us to another matter to consider:
“If an automatic commodity standard were feasible, it would provide an excellent solution to the liberal’s (i.e., classic liberal) dilemma: a stable monetary framework without danger of the irresponsible exercise of monetary powers. If, for example, an honest-to-goodness gold standard, in which 100 percent of the money in a country consisted literally of gold, were widely backed by the public at large, imbued with the mythology of a gold standard and with the belief that it is immoral and improper for government to interfere with its operation, it would provide an effective guarantee against governmental tinkering with the currency and against irresponsible monetary action. Under such a standard, any monetary powers of government would be very minor in scope. But…such an automatic system has historically never proved feasible. It has always tended to develop in the direction of a mixed system containing fiduciary elements such as bank notes and deposits, or government notes in addition to monetary commodity. And once fiduciary elements have been introduced, it has proved difficult to avoid governmental control over them, even when they were initially issued by private individuals.”
“Once fiduciary elements have been introduced, the temptation for government itself to issue fiduciary money is almost irresistible. In practice, therefore, commodity standards have tended to become mixed standards involving extensive intervention by the state. Even during the so-called great days of the gold standard in the nineteenth century, when the Bank of England was supposedly running the gold standard skillfully, the monetary system was far from a fully automatic gold standard. Even then it was a highly managed standard. And certainly the situation is now more extreme as a result of the adoption by country after country of the view that government has responsibility for ‘full employment.’ [A gold standard] is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States.”
Milton Friedman’s views on money evolved over time, though I am not sure he ever wavered on his disdain for monetization of gold. He did come to consider free-market supply of money and banking, and stripping government of their authority over money, to be worthy considerations, but for political reasons and due to ingrained customary habits on the part of the public, unlikely outcomes. I do not share this view. None the less, while I concur with Professor Friedman’s initial points above, I disagree with his conclusion. Specifically, that, “[A gold standard] is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States.” Since going off the gold standard, and due to the use of gold as a hedge against fiat paper currency demand for, and production of, gold has actually increased relative to total productive output in the United States, not decreased. If we were looking to reduce the resources dedicated to mining gold, we should return to a gold standard, not abandon it as an option. The historical evidence in the United States and elsewhere in the world is crystal clear; the gold standard failed because governments overrode the very checks and balances designed to make it successful.
Back to Mises…
“Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money.”
This statement does not advocate for a gold standard necessarily, but instead, the supply of money in any form by private participants in the economy. If government wished to spend more than it took in in taxes, it would be required to go hat-in-hand to private citizens and bankers to borrow it at an interest rate agreed to by both parties. The government could not, as it does now, print up unlimited quantities of money, depleting the value of a good every citizen must, by law, hold in at least some minimum quantity for the purchase of goods, services, the repayments of debts and taxes.
“Viewed in this light, the gold standard appears as an indispensable implement of the body of constitutional guarantees that make the system of representative government function.”
So, should we go back to a Gold Standard? While the case for a fiat gold standard in theory is plausible, and would be preferable to the current state of affairs, it is unlikely to stand up to political pressures. The reality is that no form of fiat gold standard has existed in almost 50 years and, with the exception of a very small minority in Congress lobbying for its return, very little movement on this front has occurred or even appears possible. Moreover, a non-fiat gold standard, in practice, would be adopted like language or customs are adopted by free people, not formally agreed to by members of the public and certainly not legislated in to existence by Congress. I believe what might face equal political opposition, but have far greater positive impact moving forward, would be to advocate for competition in the supply of money. Something I intend to cover in additional writings, what I am suggesting is to simply advocate for the lifting of rules that outlaw private money and currency systems that compete with the current US Federal Reserve dollar. Proponents of a non-fiat gold standard could then go about convincing the public, in their roles as producers and consumers, to use gold-based money. They could compete with advocates of other commodity-based, debt, financial and digital money proponents.
For more information on this topic please read; Stockman VS Friedman.