Shut up about the gold standard

I’m not sure that this is a point worth discussing in a public space, but every once in a while someone comes out and says something positive about the gold standard. Usually a libertarian or Austrian. The gold standard is the economic equivalent of communism, in the sense that it’s an outdated theoretical concept that used to have wide intellectual backing but has fallen out of favor on practical grounds, but is occasionally dusted off by people looking for a crazy idea to put all their caustic irrationality behind. This won’t be too long of a rant. The US won’t go on the gold standard. But it may be worthwhile to briefly consider why (and maybe I can bait a Ron Paul troll into leaving an absurd comment).

For those of us less economically inclined, the gold standard argument is fundamentally an argument about inflation, and the inflation argument, in a policy sense, fundamentally is fought along these lines: there are people who lend money and people who borrow money. People that borrow money pay back that money in small portions over time. Money, however, changes value over time. If there is high inflation, money loses value, and if there is deflation, money gains value over time. If you’re a borrower, you want high inflation, if you’re a lender, you want low inflation, because the borrower wants to pay back as little as possible, and the borrower wants to receive as much as possible.

The reason libertarians are so against inflation is because the government is a major borrower in the US (and in almost every country), and they see the government as printing paper currency to drive down the value of their debt, and with it the value of the interest bearing debt that American citizens are holding. Obviously, this something worth opposing – the government shouldn’t wantonly print money to devalue debt that its citizens are holding. Those at the extreme end of the spectrum, however, will advocate for the gold standard, because the gold standard supposedly prevents inflation. The idea is that gold has “intrinsic value”, unlike paper money, and a very limited supply, so its value cannot change, and that if a gold standard is committed to, there will be no inflation. All three of these are wrong.

The idea that gold has “intrinsic value” is one of the weirdest historical relics in the world. Gold has intrinsic value if you’re a maker of wedding bands or high end audio cables. Sure gold is rare and shiny, but so are meteor rocks. You can’t eat gold or turn it into combustion. I’m sure sometime in the future, when resources are scarce, we’ll be able to measure currency in energy credits or something like that (it happens in most in-the-future outer-space-based strategy video games I played when I was a kid, so therefore…), but until then, why bother trying? If you want to guard against inflation, buy some barrels of oil.

If there’s any sign that it doesn’t have intrinsic value, it’s the fact that its value changes significantly – just this year gold has been valued at 700 dollars per oz, and close to 1000 dollars per oz, within the span of several months. Gold is used as a hedge against inflation, and for investors, it’s a useful one, but no serious investor will tell you that the value isn’t as subject to the market as anything else. This means that gold only really has its “intrinsic value” if governments decide to use the gold standard. Sounds similar to the way paper money works, doesn’t it?

The biggest fallacy of the gold standard argument, however, is that it somehow more effectively prevents inflation. The rallying cry, especially from libertarians, is that we want to keep big government from dictating the value of our money. And yet who is going to enforce a gold standard? That task falls on the government. Fundamentally, there is zero difference between the government enforcing a gold standard and a government enforcing an inflation target. I think it’s reasonable to say that the former is a little stricter, because there are market mechanisms to keep governments honest (though demanding inflation variable treasuries works well for the latter), but that distinction misses the bigger point.

This is that gold proponents assume that governments will stick with the gold standard even when conditions are unfavorable for doing so. Governments will happily go along with the gold standard during times when there is little fiscal strain, much as they will try to keep inflation low even if there is no gold standard (look at the US during the 80s and 90s). But then something like the Vietnam war will happen, or the current financial crisis, and government will start printing money. The former event led Nixon to abandon the gold standard, while the latter has spurred stimulus spending to the point where silly people are asking to bring the gold standard back.

In order to make the gold standard work in the way it is intended to work (i.e. forever guarantee the fixed value of money), we would need a constitutional revision to prevent the government from carrying a deficit without immediately provisioning future taxes for it (and if we could do that, we wouldn’t actually have to worry about having a gold standard, because government would never need to print more money). If one Congress passes a spending freeze, the next one could easily undue it, so it would take a revision of the Constitution to create a true gold standard, but this would be totally crazy. Like the gold standard.


4 Responses to “Shut up about the gold standard”

  1. 1 David(P) May 28, 2009 at 11:03 pm

    the problem with making this argument in the form of a blog post is that the people who advocate the gold standard only communicate through youtube videos. Time to rock the video camera.

  2. 2 ittecon May 11, 2010 at 10:34 pm

    Love it. I’ve been arguing this less eloquently for ages.

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