I get lots of questions about the gold standard. Many ridicule the idea and infer that linking paper currency to a precious metal is an outdated concept. A detailed discussion on the gold standard would take volumes, but I will cover the basics in this post.
A gold standard means that all paper money can be exchanged for a given value of gold on demand. Presumably, the exchange level is fixed and the bank or central authority printing the currency would make the exchange if desired. A common myth of a gold standard is that individuals would be required to exchange physical gold in the marketplace. In such a system, however, paper money would represent gold and would serve as a more convenient means of exchange.
In contrast, a fiat currency is not backed by gold, silver, or anything else other than the good faith and credit of the central authority (government) that oversees its printing. FDR took the US off the gold standard in 1933 when he confiscated all gold, requiring that it be exchanged at the rate of $20.67 per ounce. This official exchange rate was changed to $35 per ounce in 1934, enabling the Fed to arbitrarily increase its holdings of the precious metal by 69%. The $35 “price” stuck until Nixon officially ended convertability in 1971. We have had a fiat currency ever since.
The argument for a gold standard is straightforward. If dollars must be convertible to gold, then currency can only be printed when sufficient gold exists to back it. Given the rarity and high costs associated with mining gold, expanding the money supply would be a difficult task. Inflating the currency by simply printing more of it—thereby devaluing what we already hold—would not be possible. Hence, a gold standard would make big government spending much more difficult.
Those who argue against the gold standard claim it’s not practical and is simply unnecessary. The practicality argument is weak given that gold has backed currencies throughout our history. The lack of necessity argument is equally invalid, as evidenced by the recent abuse of the printing press and massive budget deficits. Admittedly, a gold standard is less convenient than a fiat currency, but that’s precisely the point. It shouldn’t be easy for a government to spend now and pay later.
There are a number of side issues concerning a return to the gold standard, including physical storage, setting an exchange rates, and managing trades between gold-based and fiat currencies. I won’t delve into the details here. Suffice to say that while these are legitimate concerns, they can be addressed.
Raising the topic of sound money is not always easy, but the gold standard debate is really about serious fiscal responsibility. Those who scoff at it tend to be Keynesian, big-government spenders. The next time you hear the concept ridiculed, just look for this connection.
just heard you on Wilkow on this topic. I don’t understand everything about gold but this is making some sense now. You’re right about those who hate the idea of the gold standard are also big deficit spenders.
I heard Wilkow too but I don’t understand why we can’t stop spending without going back to a gold std
John-
You know me, and I’m about the farthest from a neo-Keynesian profligate-tax-borrow-print-spend Proglodyte you’ll ever find. However, and we’ve discussed this on the air, I think the logical argument is that there would have to be a drastic resetting of value before some sense of balance or stability would be reached, in world markets, given the hyper-abundance of fiat US currency (and digital debt) that currently exists. I have further reasoned that, in terms of a simple gold standard, the genie has already escaped from that lamp (and took the lamp with him because, well, it was made out of gold). I could reasonably conceive of a quad-metal standard, but it would mean convincing quite a few more skeptics to reach that point.
All that said, it really is high time the conversation gets started in the “mainstream.” Paper currency backed by “full faith and credit” has become laughable, at best, if not downright cringe-worthy.