Debunking The Gold Standard: The Myth of Stability
Thanks in large part to the hype surrounding Ron Paul's candidacy
within the Republican Party, the notion of a US return to the Gold
Standard has enjoyed renewed popularity as of late. Mr Paul supports
the dissolution of the United States Federal Reserve and a return to
the Gold Standard. Others in his ideological camp would take the matter
yet further, and some have gone so far as to suggest that the United
States do away with paper currency altogether and return to the
practice of using coins minted from actual precious metals as currency.
Like many of the solutions seized upon by hobbiest libertarians,
these monetary policies are concise, simplistic, and - unfortunately -
completely wrong. A return to the Gold Standard is not only profoundly
inadvisable for the United States, but also impractical, unnecessary,
and unrepresentative of the problems and solutions put forth by the
dicitfuls of Dr. Paul. In an effort to inject some sanity into the
debate, this article will address the first of three myths and
misunderstandings upon which the Gold Standard movement is based.
Myth: Gold Ensures A Stable Currency
Take a dollar bill out of your wallet or purse and look just to the
right of George Washington's head. Printed in small black letters
should be the phrase "This note is legal tender for all debts public
and private." These words, and the guarantee of the United States
Government, are the only things that give the US Dollar weight as a
currency, either domestically or on the international currency markets.
Some 30 years ago, in 1972, this was not the case. Under a system
called Bretton Woods, the US Dollar was, for some time, pegged at
$35/ounce of gold, meaning that one dollar was worth, by decree of the
United States Federal Government, 1/35 of an ounce of gold. The Bretton
Woods system was brought to an end in 1972 as the unequal market
pressures forced a rapid movement of dollars (and thus liabilities for
the sale of gold at $35/ounce) out of the United States. Since that
time the United States has operated on a fiat
currency, meaning that the dollar is no longer pegged to the price of
gold nor guaranteed by it. Rather, dollars have value because the
government of the United States says that they have value.
Such a notion is troubling to many as the notion of a government
controlling anything, much less money, through an exercise in self
restraint seems a joke at best and a recipe for financial disaster at
worst. Critics of the fiat system question what motive such a
government has that would compel it not
to simply print money as it sees fit, thus inadvertently destroying
overnight the value of its own currency. Gold or silver, by comparison,
can not be simply produced, and thus acts as a natural check upon this
assumed tendency to expand the money supply without consideration for
the hyper-inflationary pressures such a move would have.
The problem with this argument is not one of its accuracy, but rather a matter of degree. A fiat system is more
prone to governmental expansion of the money supply, but such expansion
is neither unique to it nor a probable course of action for its
economic governors. A gold based system is less prone
to hyper-inflationary tendencies, but by no means immune from them and,
as demonstrated under Bretton Woods, is less able to respond to rapid
changes in the market. As such, the opposition between Gold Standard
and Fiat is neither a binary one nor nearly so clear cut in its costs
and benefits as laid out by critics of the existing system.
Gold's value comes primarily from its high demand and low supply. There
are many uses and applications for gold in the modern world and a
limited supply of it. Currencies pegged to or backed by gold will
remain stable provided these two economic realities remain true. Such
monetary systems are, however, at the mercy of the global gold market.
History teaches that, should demand for gold drop significantly or if
world-wide gold production suddenly increased, gold backed currencies
would immediately and irrevocably collapse. This is exactly the fate
suffered by the Spanish (and by extension European) economy during the
early era of New World Colonialism. As Spanish galleons hauled tons of
silver and gold across the Atlantic, the European precious metals
markets went into hyper-inflation. Dutch traders, then profoundly
concerned for the long term stability of the European continent, bought
and buried gold and silver en masse
in a desperate attempt to keep the entire European continent from
slipping into a depression, but their economic sacrifice was neither
large nor timely enough to save Spain herself, which suffered the brunt
of the economic consequences of her wealth. Even Spain's gold standard
could not save her economy from the massive influx of gold and silver
brought about by her exploitation of the Americas. Indeed, Spain still
suffers some of the consequences of that economic collapse today.
The risk of a Spanish style collapse can be mitigated by allowing a
government to re-adjust the rate at which gold is pegged to a currency.
A US gold standard would, by Constitutional mandate, incorporate such a
safeguard as Article I, Section 8 clearly states: [Congress shall have the power] To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.
(Emphasis added) This safeguard and power, however, nullifies the
initial advantages listed for a gold-standard system: namely the
difficulty of devaluation and political stability.
In short, the constraints and limitations placed upon monetary
governance by a gold standard system serve as little more than speed
bumps should government seek to actively set about the devaluation of
currency. In actuality, a gold standard offers only ineffectual
protection for the money supply against incompetence and malice while
profoundly limiting the ability of well informed and well meaning
governments to enact substantive and beneficial monetary policy.
Far from ensuring a stable currency, a gold standard is a primitive relic serving only to hamper modern monetary regulation.