Gold Standard Wisdom: Let’s Go Back to Flint Knives, Too.

We’ve been hearing a lot about the gold standard lately from Tea Party loyalists and those pandering to them.  Specific elements of their philosophy and social agenda have become talking points and gained legitimacy that 10 years ago would not have been there.  Is it because the ideas have legitimacy or because people are desperate?  I think the latter.  It is worth taking the time to examining their various theoretical points from a historical and systems design approach because it shows us that while the ideas are novel, simplicity rarely works out simply.  Let’s look at the gold standard obsession.

While the Tea Party supporters love nothing more than to belittle the French, there are sometimes lessons there to be had.  The French economist Jacques Rueff, an influential de Gaulle advisor,  advocated the gold standard because he believed it acted as a restraint on government action.  Like Rueff, Tea Partiers believe that reintroduction of the gold standard would prevent the U.S. government from running up deficits and inflating its way out of debt. Straight forward in its approach, but is it true?

Any kind of rigid monetary rule limits what a government can do. But why gold rather than wheat? There’s nothing intrinsically different about gold from any other commodity. Indeed, it is of less value to our survival than many other resources. Gold is stable, so the story goes, because it is rare and it isn’t subject to natural disaster when compared against other commodities and there is some truth to that.  (Gold’s greatest draw is the fact that it’s shiny and belongs to the “right” social classIn other words; gold is about power, but that is another topic.)  If they were truly serious about removing volatility from the monetary structure, Tea Partiers could just target the consumer price index. It’s called inflation targeting. Targeting rules are a way to be sure that you get price stability and you can write them into the Constitution or the central bank statute. In other words, there are methods of producing greater stability that are reflective of the realities of a modern, global economy rather than turning to antiquated systems of valuation.  Stepping back in time, or trying to embrace “the good old days” may sound wise, but it rarely works.

You see, what they eliminate is flexibility and the ability to respond to unanticipated events. With a monetary rule, the mint’s printing presses would click on or click off in response to the latest information on gold prices or consumer prices or whatever you are targeting. Not a problem yet, but wait. What happens when there is a problem in financial markets and you have to flood the markets with liquidity?  You can’t.  While we may want to ignore reality and say “well tough shit,” that’s exactly what a central bank sometimes has to do, to act like a lender of last resort.  For the 10% of people with the liquid assets to cover a multi-year financial melt down it’s easy to weather the storm.  But most of the population isn’t in such a position.  It’s easy to have that stiff upper lip when you have nothing to lose and the ability to exploit the people at the bottom. Like it or not, the central bank simply does have to occasionally involve itself.  And the lack of flexibility is what’s wrong with the gold standard or any other simple monetary rule.

Tea Partiers would say that we wouldn’t have such dramatic and cataclysmic problems if we returned to the gold standard.  Financial instability requiring lender intervention would be relegated to history if we would just return to the gold standard. It’s simply untrue.  Look at the 19th century gold standard they so espouse. Major financial crises occurred in the United States about every 10 years. This is why during the 1907 financial crisis, which happened under the gold standard, the decision was taken to create a central bank (which didn’t finally occur until 1914).

The point is that so much of what the Tea Party loyalists have to say is interesting, but decidedly short sighted. Desperate though we might be to turn the economy around, there is a reason ideas like the flat Earth theory, Social Darwinism and, yes, the gold standard have been have fallen to the wayside. Half-baked theory is no substitute for critical thinking.

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