A Few Questions for the Many Critics of the Gold Standard
“Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with good and services.” – Albert Jay Nock
Though the dollar’s exchange value vis-a-vis gold, global currencies, indexes, seashells, and any other alleged benchmark has never been part of the Fed’s portfolio, the fact that current Federal Reserve Board nominee Judy Shelton has long expressed support for a gold-defined dollar has propelled the “gold standard” back into the economics discussion. Some who support a commodity anchor for the dollar side with Shelton, while all-too-many who disagree with Shelton have dismissed the notion of a gold-defined dollar as the stuff of witless cranks.
Up front, count yours truly as an energetic supporter of Shelton and a return to a commodity definition for the dollar. About gold or the gold standard, it should be said right away that an ongoing problem with the gold standard is that all-too-many cranks support one without knowing what it is they’re supporting. These are usually the same individuals who tie every economic ill of the last 100 years to the Federal Reserve, who believe a gold standard would force a huge contraction in so-called "money supply," who believe the Fed “monetizes” budget deficits, and who claim that the central bank was a conspiratorial creation of the Rockefellers.
I’m not one of them. And at risk of presuming to speak for others with whom I regularly discuss monetary policy with, I speak for those who view money in the way that Adam Smith did. Smith made the basic point in The Wealth of Nations that “the sole use of money is to circulate consumable goods.” Implicit in Smith’s reasoning was something that I and the others I presume to speak for understand as an historical truth: “money” wasn’t first a creation of government, plus it well predates central banks. Money was a logical consequence of producers seeking an objective agreement about value that would make it possible for producers to exchange with one another: I have bread and I want your wine, but you have no interest in my bread given your mouthwatering desire for the butcher’s meat.
Money means producers with totally disparate wants can easily trade with one another. So while money itself doesn’t stimulate growth, its existence as a trusted medium stimulates enormous growth for it enabling the specialization that gives life to productivity.
Why gold? This is a question that’s been answered by producers over millennia. Producers stressed stability of value when it came to money. Translated: they didn’t want to get ripped off. The fear was providing real goods and services for money, only for the money to exchange for exceedingly less. As a consequence, gold imbued money with credibility. Per John Stuart Mill, it appealed to producers because it was one of the commodities “least influenced by any of the causes that produce fluctuations in value.” Money defined in terms of gold would be heavily circulated precisely because the definer of it was “least influenced by any of the causes that produce fluctuations in value.”
Why gold today? I’ll confidently speak for others who broadly share my opinions on money when I say that no serious gold-standard advocate is rigid in his or her need for a return to gold-defined money. Where we’re rigid is in our belief that money of ever-changing value deprives money to varying degrees of its singular purpose as a medium of exchange that enables individual specialization. I’ll add that floating money also slows progress that is always and everywhere a consequence of investment. Why put dollars to work if the value of dollar is wildly uncertain such that any returns could be eviscerated by money the value of which is changing all the time?
Stated simply, supporters of a gold standard, commodity standard, or currency stability more broadly seek just that given our view that it elevates money to its highest purpose as a facilitator of the exchange and investment that pushes people and physical resources to their highest use. There’s also a compassionate angle to this: Americans earn dollars, and a lack of currency stability has meant that Americans have suffered periodic devaluations that have amounted to a not-so-stealth shrinking of the value of their work. Translated, we work for dollars because dollars are exchangeable for goods and services. When the dollar is devalued, the fruits of our labor are logically shrunk.
Crucial about the gold-standard advocates for whom I presume to speak is that none of us equates a commodity definition for the dollar with "tight money." To believe that a gold-defined dollar equates with "tight money" is to wholly misunderstand what money is. It's once again a faciliator of exchange. We all trade products for products, with "money" as the agreed upon medium refereeing the exchange. Translated: a gold-defined dollar would, in the eyes of gold-standard advocates, associate with soaring dollars in circulation to reflect an even greater desire on the part of producers to use the dollar when exchanging goods, services and labor. Stable, credible currencies are logically the most "supplied" or circulated currencies, while floating, volatile, uncertain currencies can rarely be found in the marketplace. Looked at in the extreme, amid Germany's post-WWI hyperinflation it was known that the thoroughly debased mark was exceedingly hard to find, and accepted nowhere, while the U.S. dollar was plentiful and commanded all manner of goods and services in Berlin. Good money is everywhere, bad is scarce. Gresham's Law is a myth.
Lastly, Cornell professor Eswar Prasad (no fan of the gold standard as far as I know) wrote in his excellent 2017 book Gaining Currency: The Rise of the Renminbi, that Confucians back in 7th century China were fans of private money over that issued by government given their belief that "the market would compel private issuers of money to maintain its value.” This is mentioned briefly given the view of some gold standard or stable currency advocates that eventually market actors will issue broadly circulated currencies that will replace the dollar, euro, yen, Swiss franc, and other heavily issued government-issued currencies. Time will tell, but it seems Amazon, J.P. Morgan, Target and Starbucks (to name but a few blue chips) dollars might hold their value better than the dollar has under the U.S. Treasury’s watch. What will this money be like? Who knows? The main thing is that a private sector that can put supercomputers in our pockets can likely issue a trusted medium of exchange that workers would prefer over Federal Reserve Notes. Still, at this point it’s all a speculation.
Which leads to the questions for gold-standard critics:
1. Why money? In particular, do gold-standard critics believe money is a medium of exchange? If no, what is money?
2. If yes, do critics agree that underlying monetary exchanges is the exchange of goods and services for goods and services?
3. If money largely exists to facilitate exchange, why do gold-standard critics think that gold emerged globally in the marketplace of currencies as “money par excellence,” in the words of Karl Marx?
4. When critics of gold take fiat money in exchange for a good or service rendered, do they take the money on the expectation that it will reliably hold its value so that they can exchange it for roughly commensurate goods and services they want?
5. Would gold critics willingly be paid a salary denominated in Bitcoin? For background, this question comes up among stable currency types quite a lot. We generally say no given our broadly held view that Bitcoin really isn’t a currency as much as it’s a speculation. To be paid in Bitcoin would force an obvious question of "Which Bitcoin?" The one that was exchangeable for $250 three years ago, the one that fetched $22,000 at one point two years ago, the one that purchased $6,000 a few months ago, or the one that commands $10,000 at present? The volatility of the so-called currency presents a problem for those who view money as a medium of exchange. Bitcoin would be too risky as a trade-facilitating measure in that depending on the day, week, month, or year, its meaning in terms of value is a wildly moving target.
6. Did adherence to the gold standard cause the Great Depression? This question similarly comes up a lot, and we can’t find the connection. For one, gold had been used as a definer of money for thousands of years. If it were an economic depressant, wouldn’t it have long before been replaced? And if it was the source of a 1930s slowdown, why did global monetary authorities (including the Soviet Union, albeit implicitly) peg their currencies to a dollar defined as 1/35th of an ounce in 1944? Did an economic downturn ensue? President Nixon de-linked the dollar from gold in 1971, and for good in 1973, but the ‘70s were a pretty brutal, stagflationary decade as we recall.
Some say the gold-defined dollar led to “tight money” that restrained the Fed in the 1930s, but such a view ignores that the Fed had a very limited mandate back then. It was supposed to act only if lending rates among banks soared, but per monetary expert Nathan Lewis, “overnight lending rates between solvent banks remained low, indicating that there was no systemwide shortage.”
Was it a money supply thing? Some critics yet again say the Fed “tightened” money, but Lewis has exposed such theorizing as false. Furthermore, such thinking presumes that money is an instigator of economic activity as opposed to a consequence. What do the critics think? If it’s an instigator of economic growth such that Fed “tightness” restrained growth in the 1930s, could Cairo, IL, Charleston, WV and Buffalo, NY be modernly revived economically if the Fed aggressively bought up interest-bearing bonds from banks in each city? More broadly, could Bridgeport become Greenwich, East Palo Alto become Palo Alto, and Baltimore become Bethesda if the Fed “guns money supply” in the perpetually recessed locales, or is money yet again a consequence of economic activity? Why is there so much money in Pasadena, but relatively little in Duarte, CA? Coincidence, the Fed, or is productivity higher in Pasadena?
Lastly, why would a stable currency in terms of value cause economic ill health? Isn’t money just a veil as is? Doesn’t it just measure? No doubt the Bureau of Weights and Measures could shrink the inch in order to double my height to 12 feet, but my actual height wouldn't change one iota, and NBA teams would still have no interest in my services. Isn’t the disdain for money as a consistent measure among gold-standard critics underlay by a mystic belief that monetary manipulation can alter reality?
7. Critics of dollar-price stability lament that a rigid dollar in terms of price would limit the ability of monetary authorities to act during downturns; the implicit point that a price rule would limit the ability of monetary authorities to devalue. Ok, but Americans earn dollars, so how would devaluation help them? So do corporations earn dollars. Investors seek returns in dollars, and investment drives economic growth. How would devaluing the returns of investors boost the economy? Or is it the point of critics that investment isn't important to economic growth? If not, what is?
8. One gold standard critic acknowledged the truth that gold “proved” a reliable medium of exchange that market-based producers happened on in the past, but he stressed “proved” in the past tense. So what’s changed?
9. Why, if stability in terms of value no longer matters, do so many countries peg their currencies to relatively stable currencies like the dollar, euro, yen, Swiss franc?
10. If gold is a past tense concept, as in if it is no longer necessary as an anchor for currencies, why were currency trading markets rather non-existent before 1973? And then why is currency trading a $5 trillion/day industry today? In short, if gold is some barbarous relic, why all the trading among currencies meant to mitigate their modern instability; instability that is plainly a consequence of a lack of a commodity anchor?
So here we go. Lots of questions, but maybe ones that, if addressed, will lead to some kind of understanding. Question #10 is the one I’m most curious about. To be clear about this, gold-standard advocates aren’t so much wedded to gold in religious fashion as they’re wedded to the currency stability that gold once provided, but that no longer exists as $5 trillion daily currency markets persistently remind us. If currency stability no longer matters, why is there so much currency trading?