Talking About the Gold Standard
My friend is considering the purchase of a new house. She’s worried about financing, and what the economy will look like in 20 years.
When I looked at new cars the other day, I wondered what the interest-free financing meant in real money terms, and I asked the salesman. He did not know.
As the red ink rises and the economy falls, barely a week goes by without mention of world currencies. Some articles discuss whether the United States should return to the gold standard. Governments worldwide are worried about the dollar and want the alternatives.
Since the mid-20th century, the United States has been in a sense the world’s currency. There are many advantages to this position. Two-thirds of our dollars are held by people who don’t live in United States. We get something for just printing a piece of paper with a serial number and a promise to pay based on fiat (government decree). They get no interest.
The Chinese own more than a trillion of our debt. Growing government deficits bring instability, and between rising social welfare, the recession, Wall Street bailout and the stimulus bill, the Chinese are worried.
St. John’s University economics professor Louis Johnston said “one reason why some countries may want to adopt a gold standard, or for that matter a dollar standard, is that they may be unable to adopt monetary policies that are necessary to keep inflation low and stable. Thus, they can basically give up and tell the U.S., ‘you can manage our monetary policy.’ ”
It turns out this is an ancient argument. The gold standard in the United States came after the Civil War as part of the economic philosophy of the times. It was a major political battle because, without new gold finds, prices tended to fall. This made the burden of paying debts difficult for farmers and other debtors. Assuring people their money could be converted to gold or dollars constrained their governments to control spending.
Presidential elections included the “Free Silver Movement” (asking for a second metal to be used for money, which would cheapen it) and the famous Cross of Gold speech by William Jennings Bryan in 1896. The Fed started in 1913 after the panic of 1907.
Johnston believes the gold standard and the Federal Reserve could coexist. “In fact,” he said, “one of the original rationales for creating the Fed was that the U.S. needed a central bank (like Britain, France and Germany) to manage its part of the gold standard mechanism.”
But after World War I came the Great Depression. Country after country abandoned gold standard after the Depression. During World War II the allies held a meeting at Bretton Woods, N.H., to establish that the dollar was fixed to gold and everyone fixed to dollar. But that ended in 1971 because the United States didn’t want to play by those rules either.
I asked Johnston if the gold standard made sense for today, and he argued that it would not. “Governments have no better sense of what a currency ‘ought’ to be than anyone else, so there is no case to give a government a monopoly in this area. Let markets determine what the value of a currency will be.”
It turns out the value of our currency is not assured by government promising to convert money to gold. Instead, it depends on government doing those things that a gold standard would require. If we have the gold standard and no discipline, it fails. If we have the discipline, we don’t need a gold standard to tell us what our dollar will be worth 20 years from now.
Do we have that discipline now?
This article published in the St. Cloud Times, 3 July 09.
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