Three Things a Gold Standard Would Happily Not Achieve
Hard as it may be to believe, in 1700 India accounted for 24 percent of the world's ouput, versus 3 percent for England. According to Niall Ferguson's 2002 book Empire, England also had an economy that was half the size of France's.
But thanks to the Glorious Revolution that led to the Dutch royal family taking control of England, the once sagging country was lucky enough to "import" Dutch monetary policy; specifically its gold standard. And with the pound suddenly credible to investors thanks to its gold definition, the economic situation in England changed for the better in very rapid fashion. With stable money comes investment, and investment is the author of economic progress.
At the same time, and this is for good or bad depending on one's view of the concept of "empire," England's leaders were suddenly able to borrow with ease such that they could fund the accession of a global empire that as late as World War II's end accounted for ¼ of the world's land mass. As Ferguson put it, "Britain had one crucial advantage over France: the ability to borrow money. More than a third of all Britain's war expenditure was financed by loans." In his 2001 book The Cash Nexus, Ferguson observed that as the French had no equivalent guarantee of gold convertibility for the franc, the French government couldn't raise debt as England could with ease.
This little bit of British history looms large in any ongoing discussion of what would be very desirable: a return to gold-defined money in the U.S.; a return that would quickly bring with it positive global implications. Important for now is the discredit of three popular misconceptions about gold-defined money that are mistakenly used by gold advocates to support a return to stable money. They support three myths that are not only false, but wouldn't be desirable even if gold were to achieve them.
Gold supporters strangely promote the falsehood that good money would lead to greatly reduced budget deficits, "tight money," and reduced wealth inequality. None of the three would come to pass, and that's something to celebrate, not lament.
Indeed, as the England example makes plain, gold-defined money would if anything make it easier for governments to run deficits. This is so elementary as to almost be superfluous to discuss. It only rates comment because so many falsely suggest that quality money would reduce budget deficits.
In truth, whether it's private debt or public debt raised by the U.S. Treasury, in each U.S. instance (this would also be true globally as countries would quickly define their currencies in terms of the gold dollar) the income streams from the debt would come in dollars. With the dollar a great deal more credible, and specifically not subject to the devaluations that politicians are prone to pursue in fiat currency regimes, the attractiveness of dollar-denominated debt (whether private or in Treasury form) would increase substantially.
Wise economists for centuries have made the correct point that gold-defined money keeps governments honest, but modern thinkers have sadly misread this basic point. What it tells us is that quality money is one of the pillars of honest government, and because it is, its implementation - as England's story reveals - would render borrowing very simple.
Importantly, a focus on deficits misses the point. A dollar is a dollar is a dollar, whether it's taxed away or borrowed. Either way, limited capital is being extracted by politicians who will always and everywhere allocate it in ways less economically stimulative than their market-disciplined peers in the private sector.
It's the level of government spending that matters, and it matters for it signaling the amount of resources being captured by governments to most often waste. Deficits are just finance. Gold will if anything enhance the ability of governments to borrow, at which point it's up to voters to make sure politicians are leaving the abundance wrought by stable money in the private economy where it can have the most positive economic impact.
Along similar lines, those who support gold-defined money talk up the alleged "tight money" implications of such a move. Nothing could be further from the truth. Credible money is logically demanded by most economic actors, and if this is doubted, those interested in buying a company from a seller might ask what the seller would prefer in return for his company: Swiss francs or Argentine pesos. It doesn't take a monetary expert to know what the answer would be. Just the same, those seeking to raise debt might try denominating it in Argentine pesos over Swiss francs. Lots of luck with a debt offering in pesos.
What this tells us is that if the dollar is revived with a gold definition, the supply of dollars will soar in order to meet the rising demand for dollars as a credible unit of measure meant to facilitate exchange and investment. In a money "supply" sense, a quality dollar would become rather "loose" as it would be the preferred currency for almost everything.
Similar to the discussion of deficits under a gold regime, Ferguson referenced England's period as the issuer of quality, gold-defined money par excellence, and unsurprisingly British rates of interest for pound-denominated debt were among the lowest in the world. We saw the same in the U.S. as recently as the 1960s when the dollar still had a gold definition. Very low rates of interest.
Far from "tight money" when gold is the definer, the real truth is that rates of interest on debt measured in money convertible into gold fall to the lowest in the world. This too is elementary. If accession of debt is a function of paying it back in currency that will maintain its value, then the borrowing part is much easier. British consols representing government debt were essentially "forever bonds" back in the 19th century precisely because investors trusted the income that the debt would generate. Fiat money represents "tight money," not money whose most animating feature is stability in terms of value.
All of which brings us to the third major myth about gold that is promoted by those who support a return to sound money: they oddly claim that it would reduce wealth inequality. Here their hearts are in the right place. Floating, weak money is surely anathema to the lowest earners who most often have no way to protect themselves against monetary debasement. In that certain sense, a return to gold would be great for the poor and middle classes, but it must be stressed that under a gold standard system wealth inequality would - very happily - soar; all of this to the betterment of those not at the top of the wealth pyramid. Read on.
What needs to be remembered about weak, floating money is that it's anti the very investment that fosters amazing economic advances. When the value of money is uncertain, those who have it protect in hard sinks of wealth (think land, art, rare stamps, gold, etc.) least vulnerable to devaluation. As a result, the economy sags in a relative sense due to a lack of economic experimentation or, what George Gilder refers to as the "leap."
Conversely, a return to stable, gold-defined money would render devaluation hedges much less attractive to those who have access to capital. What this tells us very explicitly is that quality money would unleash a surge of investment that would lead to staggeringly brilliant economic advances.
Figure the car, airplane, health cures for maladies like Polio, computer and internet were all the result of investment, and all profoundly changed our lives for the better. These brilliant advances also logically birthed amazing fortunes for them enhancing the ability of entrepreneurs to serve the only closed economy; as in the world's economy.
A return to gold would tautologically lead to voluminous investment on the way to innovations that would render the best cars, computers, cures and internet connectivity of today rather prosaic in comparison. Even better, innovations we never thought we needed (was anyone calling for online shopping in the ‘80s?) would reveal themselves in rapid fashion.
Our lives would be improved immeasurably by these advances, by definition. Innovation merely turns the baubles solely enjoyed by the rich, or concepts so advanced in scope that they're enjoyed by no one, into common goods to be enjoyed by all. What needs to be stressed here is that such a scenario would lead - quite positively - to wealth inequality that would make today's appear tiny by comparison.
Far from a bad thing, we'd all be much better off. If this is doubted, readers need only ask if they would give back the car, computer and internet in return for the false God that is greater wealth equality. No doubt the congenitally socialist would, but the vast majority would not exchange the myriad wonders divined for us by the world's richest.
Time will tell if we do the right thing and return to a gold-defined dollar. Such a move would be brilliant. The concern now is that assuming a migration to credible money, those who support it are setting expectations about deficits, "tight money" and inequality that are not only wholly unrealistic, but also totally undesirable.
