You know the world economy is in trouble when opinion pages are proposing moving the global monetary system back to a gold standard. Indeed, a rather unscientific look at Google’s search timeline shows a significant spike in such talk during economic crises.
This is true of the early 1970s and 1980s, and again right now. One prolific and persistent advocate of the gold standard is Lewis Lehrman, an investment banker who sat on the Gold Commission alongside US presidential-candidate Ron Paul in 1981 and with whom he co-wrote The Case for Gold in 1982. Since then, Lehrman, who is an ex-Morgan Stanley MD and now runs his own firm, has consistently argued that the US dollar’s role as the world’s official reserve currency is the primary cause of instability in the global financial system -- and particularly the floods of liquidity that have ravaged markets recently.
Last week, Lehrman wrote an opinion piece in the Wall Street Journal dissecting President Richard Nixon’s shock decision in 1971 to end the gold window, which had allowed foreign countries to exchange dollars for gold. Since then, he wrote, the purchasing power of a dollar saved has fallen to just 18 cents today — accompanied by a corresponding transfer of wealth to the rich.
“Inflation silently confiscates the savings and wealth of lower- and middle-income people, making them angry taxpayers, longing for reasonable economic policy to protect their hard work and savings for the long term,” he wrote in a letter to the newspaper yesterday. “Devaluation, depreciation of the currency and floating exchange rates intensify the race to the bottom, a boon only to speculators and subsidised bankers inside the Fed bailouts.”
Such proponents argue that a gold standard improves the quality of money because it provides a constancy of value — which is diminished when the world’s reserve currency is open to flagrant manipulation by politicians keen to secure votes. The conspiracists like to claim that even Milton Friedman, father of the modern monetarist school, had his doubts about quantity theory towards the end of his life. “The use of quantity of money as a target has not been a success,” he said in an interview with the Financial Times in 2003. “I’m not sure I would as of today push it as hard as I once did.”
A common objection to a modern gold standard is that there isn’t enough gold in the world to back the dollar, let alone all the world’s currencies. However, even under the classical gold standard, argue advocates, there was never 100% backing of currencies. Britain’s gold reserves, for example, fluctuated wildly in the late-eighteenth century without affecting the value of the pound.
In short, they say, a gold standard does not artificially limit the supply of money. “Between 1775 and 1900, the US base money supply increased by 163 times — in line with an expanding economy and a population that went from 3.9 million in 1790 to 76.2 million in 1900,” wrote Ralph Benko, who works at the Lehrman Institute and is affiliated with the Tea Party, in a recent essay titled Memo to our Madmen in Authority. “Over this 125-year period, the amount of gold in the world increased by about 3.4 times due to mining.”
Robert Zoellick, the World Bank president, caused a stir in Singapore last November when he was reported to have said the world’s developed countries should consider using gold as an “international reference point of market expectations”, but he quickly re-interpreted his own comment to suggest that gold could exist alongside other currencies in an international reserve basket.
In truth, the idea of turning the clock back to the nineteenth century is absurdly impractical on almost every level — though Somali pirates would doubtless welcome the idea of gold shipments criss-crossing the planet.
The technical merits are interesting to consider, but they are barely relevant as the biggest obstacle by far is political. Even if Lehrman and his friends are right, it is impossible to imagine that US politicians, who cannot agree on the most basic fiscal policy, are ever likely to agree to curtailing their own freedom to borrow money, despite the rhetoric of the Tea Party. Even the political right balks at the idea of giving up the dollar’s role as a global reserve, and feels safer in the knowledge that America can always print money to pay for wars if necessary.
A related problem with the idea of a gold standard is that it requires politicians and central bankers to be much more disciplined economic managers than they are today, because the costs of failure are so severe. Despite the impassioned sincerity of gold’s proponents, that seems like a recipe for disaster.