And in those rare instances when the issue is deliberately studied and intensely debated a strict, populist view of the gold standard has tended to lose. The 1980s Gold Commission is the most recent, and probably the most thorough, currency discussion the nation has ever had, under some of the most favorable political circumstances that goldbugs could hope for—and it roundly rejected a gold standard. The founding of the Federal Reserve system in 1913, often cited by today’s gold populists as a kind of original sin, was also an example of a policy that had been studied for decades—it, too, rejected a pure gold standard. For better or worse, today’s gold populists have failed to make the political case for their system at the very moments when they might have succeeded. That problem may be intrinsic to the task of trying to turn monetary policy backward. Kenneth Dam, University of Chicago law professor who worked in the Reagan and George W. Bush administrations, has noted: “The case for a gold standard is most appealing when inflation is rampant but, paradoxically, rapid inflation makes a gold standard impracticable.”8
Moreover, existing governmental and financial institutions have powerful, almost intractable reasons for sticking with the monetary status quo—notably, the ability to fight and pay for war. One of the most appealing ideas behind American support for gold-backed money is this: if you make the government stick to money backed up in gold, you actually remove both the ability and the temptation for Congress and the Federal Reserve to screw the economy up. As former Kansas City Fed chairman and onetime Republican presidential contender Herman Cain wrote in a 2012 Wall Street Journal op-ed: “Gold is kryptonite to big-spending politicians. It is to the moochers and looters in big government what sunlight and garlic are to vampires.”9
For all its obvious appeal, this argument has repeatedly been trampled by war. It is remarkable to consider that more than 150 years after the end of the US Civil War, there remain critics who say that Lincoln’s decision to issue “greenbacks”—paper money not backed by any metal—was a violation so great that allowing secession to proceed would have been more constitutionally sound than finding a way to raise money to fight to protect the Union. Such views may contain a perverse intellectual consistency, but very little realism. If the Constitution gives the government the power to declare and fight wars, it surely follows that the government has the right to raise money for that purpose. Every major war (and several minor ones) that the United States has fought since then has required some kind of deficit spending or debt acquisition that would be extremely difficult under a strict form of gold standard. That hardly means that imposing a gold standard would make wars or war spending impossible—merely that it would force the future Lincolns and Roosevelts and LBJs to find clever and debatably legal ways around its restrictions. A good analogy is the balanced budget amendment. Many American conservatives argue that adding such an amendment to the US Constitution would rein in spending; as evidence of its viability they point to the dozens of individual states that have such amendments. But the argument demolishes itself—such amendments rarely restrain states from exercising the spending authority that they truly believe they want and can politically get away with. The amendments simply force governors and legislatures to use gimmicks and runarounds.
A similar point is that financial institutions, notably the Federal Reserve, will fight to protect their ability to mitigate recessions. This is almost literally a twenty-first-century dividing line between technocratic opinion and gold populism. Technocrats argue that the very existence of a central bank was required a little more than a century ago because the Panics of 1893 and 1907 demonstrated how powerless a fragmented banking system and Treasury was. In this view, the Great Depression was also either created or accelerated by a Federal Reserve system that did not or could not avail itself of necessary tools.10 Most of America’s financial leaders regard returning to a gold standard as a dangerous road to the past.
Assuming, however, that all the political and institutional obstacles to a gold standard could be overcome, that still wouldn’t solve the supply problem that has stymied every previous attempt to peg monetary value to gold. Quite simply, there will never be enough gold in the world to support the US economy at its current size. Any form of the gold standard in the United States, from the founding of the Republic through Bretton Woods, has been accompanied by a fear that the gold supply was insufficient—a fear that repeatedly spilled over into crisis. In the late nineteenth century, Treasury’s gold dwindled to the point where it had to be bailed out by J. P. Morgan. Sixty years later, even with the country having amassed the largest stockpile of gold in human history, the same scenario repeated itself, with multiple gold bailouts coming from the International Monetary Fund in the late 1950s and in 1960.
Even granting that gold provided a salutary monetary standard in the agrarian nineteenth century, the growth of the US and world economies has far outstripped the amount of gold available to conduct daily business, leaving aside the tremendous impracticality of doing so. The Roosevelt White House acknowledged this in the 1935 gold-clause case arguments; thirty years later, a congressional committee reiterated the point: “There is not enough gold in the world to permit its being used as an international medium of exchange, for actual transactions between private traders, simply because there is so much more business than there is gold.”11
A related question is how a return to the gold standard would affect the market price of gold. The massive amount of cash and other Treasury securities in existence would need to be backed up by gold owned by the US government. In 2012, when Republican candidates suggested a commission to study a return to the gold standard, the commodities analysis group Capital Economics pointed out that the monetary base of the United States was about $2.56 trillion, and that the amount of gold in US reserves was about 262 million ounces. That would give the gold in US vaults an implied value of about $10,000 an ounce, or approximately 5 times the market price of gold in mid-2012. That might make current holders of gold ecstatic, but it could also have drastic economic consequences for people across the world.
Of course, an explosion like that wouldn’t happen overnight, and it would also be possible to reserve only a fraction of the country’s currency against gold—as was the case throughout the twentieth century until the connection was dissolved altogether. But even that action could be construed by gold-standard purists as undue government influence, because who would get to decide that fraction and thereby determine an “official” price of gold? In practice, it could only be the federal government and the US Federal Reserve, in conjunction with the world’s other major, gold-holding central banks—precisely the kind of elite control over currency that gold-standard advocates have long opposed. The economic stakes of getting such a calibration “wrong” would be very high, and inevitably would create winners and losers, depending on what assets existing investors currently held and whether the new price would revalue those assets up or down. In a very important sense, the essence of fixing the price of a currency to a chunk of gold means there is never a “right” time or right rate at which to do it. The author and financial adviser James Rickards, who favors a role for gold in the international monetary system, has written: “To have a gold standard today that was nondeflationary, you’d have to have a price between $10,000 an ounce and $50,000 an ounce depending on which assumptions you want to make about the choice of money supply, the percentage of gold backing, and the specific countries that would be included in the new system.”12 Needless to say, the difference between $10,000 an ounce and $50,000 an ounce is vast, and the consequences of one price versus another could be catastrophic.
Also unclear in such a scenario is whether the official price of gold as established by a renewed gold-dollar link would apply to the world’s private gold market. That is, if the gold-dollar ratio were fixed at the price of the time of this writing—about $1,200 an ounce on the spot market—would that price be enforced by central bank action on the private gold market? Such price containment
would be immeasurably harder than it was in the 1950s and 1960s. Alternatively, the new price could be applied only to government transactions, as was the case after 1968, and the private market left to its own devices. In neither instance, as administrations from Eisenhower on can attest, is the record of stability encouraging.
Supply and volatility problems are two major reasons why today, most of the world doesn’t want a gold standard. As of this writing, not a single major economy anywhere in the world defines its currency in terms of gold or any precious metal. Indeed, the trend in recent decades has been in the opposite direction. Switzerland was the last major economy to remove the gold standard, through a 1999 referendum that took effect the following year. In 2014, a populist/right movement managed to get a new referendum before voters that would have increased the amount of gold the Swiss National Bank needed to back up the franc; voters rejected it by nearly 4 to 1.
As in the United States, the governments and central banks of the world long ago determined that their interests are better served without tying money to gold. It is true, as Rickards notes, that many countries continue to stockpile gold in what he labels a “shadow gold standard.”13 That is nonetheless a far cry from an actual gold standard, and China’s recent history of managing the value of its currency suggests that it might well have reasons to resist a return to an international fixed standard. To get China, Japan, Russia, India, Brazil, and the larger economies of Europe (some of which use the euro, some of which don’t) on board with a new gold standard would require an international lobbying effort larger and more complex than Bretton Woods, and without, at the moment, the kind of urgency and consensus that existed in the waning days of World War II. The issue isn’t simply whether the United States should adopt a monetary system based on a popularity contest. Rather, the realities of the twenty-first-century economy mean that trade is as genuinely global as it has ever been. And it is not merely a question of the billions of dollars of trade in goods and services between the United States and other countries, all of which could be affected by a switch to a gold standard. Trillions of dollars of foreign-exchange transactions take place every day, with the large majority of them denominated in dollars.14
The alternative would be for the United States to impose a gold standard on its own. This seems destined to lead to outcomes at odds with the stated goals of gold-standard advocates. If the United States reopened the gold window, what would prevent a repeat of the balance-of-payments crisis that began in the 1950s and was only resolved by shutting the window? Any country or combination of countries—including China, Russia under Vladimir Putin, or an even more antagonistic regime—could in theory threaten the monetary system of a gold-standard United States by exchanging dollars and dollar-backed securities for gold. Just as Stalin’s idea of “socialism in one country” proved unworkable, a gold standard in one country would over time undermine itself. The economist Michael Bordo, who has published numerous papers and books on the gold standard, recognized this decades ago: “One country alone on the gold standard would likely find its monetary gold stock and hence its money supply subject to persistent shocks from factors beyond its control.”15 Whatever weaknesses the current international currency system may have, the use of interest rates and exchange rates as feedback mechanisms to adjust currency valuations tends to prevent most major currencies from experiencing the shocks that were common during the gold-exchange standard of Bretton Woods (and indeed caused that system to be abandoned).
The sheer infeasibility of a twenty-first-century gold standard is a chief reason why almost no mainstream economists advocate a return to a gold standard. This was perhaps the most striking feature of the Gold Commission in the early 1980s. The Commission literally could not find enough supportive, presentable economists to populate a single hearing. The more careful ones who did, such as Arthur Laffer, believed that the system had to be protected from the vagaries of any commodity market. Those hedges, in turn, were not acceptable to the politicians (represented in this instance by Ron Paul) for whom the gold standard was a kind of measure of political purity.
There are some respected economists and financial figures who argue that the gold standard in economic history was superior to other monetary systems. The British economist Susan Strange wrote in 1988: “Never since then has there been so long a period of financial stability, both in the credit system and in the relations of major trading currencies.”16 In 1981, the Federal Reserve Bank of Saint Louis published a paper that concluded: “Economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary money.”17
Of course this period included one of the worst economic episodes in US history—the panic of 1893. And even accepting that judgment on its own terms, many systems that worked reasonably well in the nineteenth century are not necessarily appropriate for the twenty-first. When you ask economic experts today, you get a uniform opinion (which is hardly the norm in economics): returning the United States to a gold standard, regardless of whatever theoretical merits it might have, would be bad for American jobs and for price stability. Of forty economists teaching at America’s most prestigious universities—including many who’ve advised or worked in Republican administrations—exactly zero responded favorably to a gold-standard question asked in 2012.18 Austan Goolsbee, the former chairman of Barack Obama’s Council of Economic Advisers, responded: “Eesh. Has it come to this?” And Richard Thaler, an economist at the University of Chicago, asked, “Why tie to gold? Why not ’82 Bordeaux?”
Beyond their belief that a gold standard would hurt the economy, technocrats see the entire enterprise as silly, as premodern, echoing John Maynard Keynes’s description of gold money as a “barbarous relic.” Today, massive amounts of money change hands instantaneously; maintaining that velocity and flexibility is vital in a globally integrated economy. By contrast, even if you’re only using gold as a currency’s reserve, it’s bulky, heavy, and impractical to transfer. Just a few decades ago, if, say, France wanted to buy gold from the US Federal Reserve, the idea of actually shipping bullion overseas was expensive and unthinkable. Instead, bars of gold would literally be moved from one part of a vault to another, via forklift. Today’s technocrats share the view of Robert Triffin, an economist who in the late 1950s predicted that the Bretton Woods version of a gold standard could not sustain itself, and commented: “Nobody could ever have conceived of a more absurd waste of human resources than to dig gold in distant corners of the earth for the sole purpose of transporting it and re-burying it immediately afterwards in other deep holes, especially excavated to receive it and heavily guarded to protect it.”
Even F. A. Hayek, the Nobelist free-market economist and social philosopher who died in 1992 and whose theories of currency competition inspired many modern American gold-standard advocates, came to believe that the system was unworkable. “I sympathize with the people who would like to return to the gold standard. I wish it were possible,” he said in a 1984 interview.19 “I am personally convinced it cannot be done for two reasons: The gold standard presupposes certain dogmatic beliefs which cannot be rationally justified, and our present generation is not prepared to readopt beliefs which were old traditions and have been discredited. But even more serious, I believe that any attempt to return to gold will lead to such fluctuations in the value of gold that it will break down.”
On a pragmatic political level, it almost doesn’t matter if the majority of economists are “wrong.” A return to a gold standard requires a huge change in public behavior, and a wholesale disruption of the multitrillion-dollar international economy. Such momentous decisions will be made only by some combination of the executive branch, Congress, and the Federal Reserve Board. No responsible democratically elected federal government is going to undertake such a massive project against the advice of the established financial and economic community—the risk, both economic and political, is simply too high. Th
e mere airing of oddball views on gold made many Republicans in the mid-1980s aghast at the direction that gold seemed to be driving the party. Jim Leach, an Iowa Republican elected to the House in 1977 who would serve for thirty years, said in 1984: “We’re very close in the Republican Party to endorsing the gold standard. That’s nuts. Somebody’s got to tell the world, or it’s going to happen.”20
And yet, what seemed “nuts” to a Republican in 1984 has today effectively become party doctrine, at least at the presidential level. The rise of populism within the GOP in recent decades has a parallel in the form of gold populism. Gold populism not only rejects the technical expertise offered by the Federal Reserve and the economic establishment—it flips it on its head. Gold populists argue that supposed economic expertise is one of the sources of the problem—indeed, it may be the biggest source of the problem. To gold populists, the authorized alternative to a metal-backed currency is fiat currency that too easily creates accumulating mountains of debt in the United States and abroad. Sooner or later, they surmise, that debt will collapse on itself, and an international monetary reckoning will occur. The winners on that day, they say, will be the ones holding the most gold. Thus far, twenty-first-century history has provided these advocates with plenty of evidence—from the Great Recession to the Greek crisis to the British vote to leave Europe—that the day is nigh. Because even the most powerful and best-run political and financial institutions are unlikely to ever prevent future shocks like the Great Recession, that argument will always find adherents.
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