The gold standard is coming back in a a big way. Not only do a number of recently elected congressman and Senators favor a return to the gold standard: the President of the World Bank recently initiated a conversation about returning to gold, and the New York Times recently ran an editorial by James Grant on the urgent need to bring gold back. Fox News has guests arguing that return to gold is already happening. Right wing TV and radio advertisers constantly promote gold as a hedge against the coming disaster. A German company is apparently making gold vending machines, so that you can insert your credit card and get back a small amount of gold. What you’ll do with one gram gold bars is unclear.
People often say that our paper money is “backed by nothing,” but this isn’t true at all. It’s backed by our collective labors, the “gross national product;” by the physical assets of the United States of America, its lands and parks and forests; by its military and its courts, by the rule of law: hardly nothing, these count among the greatest achievements in human history. Soldiers and Marines fight and die for these things every day. To say our money is backed by nothing is to say that the United States is nothing.
But it’s true: you can’t walk into to a bank, present some paper money, and ask for the United States of America in return. No single, tangible commodity backs our money: there’s no gold standard, no silver standard, just paper. And the amount of paper in circulation varies according to a bunch of things, including how the Federal Reserve thinks we are doing.
People who like the idea of a gold standard like the idea that gold has “real,” “intrinsic” value, which is a fancy way of saying it just is valuable, in the same way that lead is heavy. “Value,” they argue, is a property installed in gold by God or nature. An economy based on gold is thus an economy founded in natural law: gold bugs dream of an economy which government can’t tamper with. All values will be “real” values. The government can’t issue more gold, so it can’t create debt by simply printing more money.
This is mostly true, but most people stop and think a bit when it’s pointed out the the Revolutionary war, the Civil War, and WWII were all financed by printing paper money, as was the defeat of the Soviet Union in the Cold War, the construction of the Federal Highway system, the Manhattan Project, the development of the Internet, the founding of Microsoft-I could go on.
And also, a gold standard would not really stop the magical creation of money, unless you’re going to insist on using gold coins only. A bank always lends out more money than it has in its vaults: it has $50,000 in cash, but it lends out $100,000. The bank is “creating money” by making a bet on the creative powers of the people it lends to, like Jimmy Stewart in It’s a Wonderful Life. A gold standard won’t stop this. And if it did stop it, it would be the end of industrial capitalism, which is based entirely on credit, and on creating new money by lending. When we get the loan, on good terms, we tend to like credit. When lots of loans default, as in 2008, we tend to think credit is bad and we want “real” values again.
Gold bugs think paper money causes inflation not just in the sense of high prices, but in a general sense of “society out of control.” Here’s an interesting example, a cartoon by Thomas Nast published in 1876.
Nast depicts a world gone crazy. In the cartoon paper money, the “rag baby,” amounts to a silly, childish delusion that denies reality. But consider the drawing of a cow: “this is a cow, by act of the artist.” Paper cows don’t give milk. But a really good drawing of a cow could easily be worth more than an actual cow. And in Chicago, even as Nast worked, traders speculated in the futures market, in which hypothetical cows and non-existent bushels of wheat represented only by pieces of paper daily made and lost fortunes.
Nast’s drawing shows how he wants things to be “real,” to be literal. But the drawing itself, nothing more than lines on paper, creates value: it expresses real political arguments: “this is the gold bug position, by act of the artist.” Added to a book on money, it increased the book’s value.
Nast is a great example of how mere marks on paper can create value. Ask most Americans about “Boss” Tweed and a Nast cartoon, recalled from some textbook, springs to mind. Even more, Nast often gets credit for inventing Santa Claus: his paper imaginings of the jolly bearded elf-master now support an industry that annually generates billions of dollars: an entirely fictitious person generating massively real economic effects. So if Nast’s paper drawings can embody Santa Claus, and create value, why can’t paper money?
The MIT economist Frances Walker1 claimed in 1889 that paper money caused not just high prices: it caused bad taste in clothing, it created both effeminacy and coarseness; it undermined male authority: it increased foreign influence and put the wrong sort of people in charge.
I need not recall the wanton bravery of apparel and equipage; the creation of a countless host of artificial necessities in the family beyond the power of the husband and Father to supply…the humiliating imitations of foreign habits of living…the loss of that fit and natural leadership of taste and fashion.
All this caused by paper money! Clearly what was at stake was more than just prices.
When you see arguments for the gold standard, look how often they are linked to a sense of general derangement in social affairs, or apocalyptic arguments about collapse and degeneracy. It is certainly true that hyperinflation, a condition where prices spiral upward out of control, is a disaster. But when the ostensibly reasonable James Grant, writing in the New York Times, praises gold for its “its utility, economy and elegance,” and warns that paper money will cause “wall-to-wall European tourists on the sidewalks of Manhattan” something besides the price of eggs is at stake.
The gold standard has never prevented economic boom and bust cycles, and in never can, because there is no “real” price, and value is not a thing, it’s a process. You often hear economic analysts or journalists talking about a “market correction,” as if market made some mistake and got back to the “correct” price; or the guys on NPR’s Marketplace talking about stocks being “overvalued.” Neither of these terms make any sense: the value or price is simply what people are willing to pay, and that changes with time and circumstance. There is no “real” price.
It’s comforting to believe there is: hence the enduring fantasy of the gold standard. Slate ran a good piece on what would happen if we returned to the gold standard. You can add to that rapid deflation and spikes in interest rates. Deflation sounds good, except that interest rates would spike while the prices manufacturers and businesses could get for their goods would collapse. Deflation was precisely the problem in 1932. But one set of people would benefit to a remarkable degree, and that is, those who hold capital, e.g the rich. The value of their money would skyrocket, as would the price they could demand for lending it.
So when you see arguments for the gold standard look for the obiter dicta, the rhetorical flourishes used to make the argument. And consider who stands to gain the most by a return to the favored scheme of Gilded Age robber barons.
Update: More on gold language