We can only hope that this iteration of Republican pandering to the gold bugs bears no more fruit than the last one. Touted as a cure for the chronic financial instability that central banking purportedly breeds, tying the nation’s money supply to the supply of gold would be worse than the disease.
As history abundantly demonstrates, the gold standard would not immunize the economy from financial crises. Imposing it would, however, render the central bank powerless to respond to them, as it could not readily expand credit or act as lender of last resort to solvent institutions. Also, China was the world’s largest producer of gold in 2011. Just sayin’.
The case for the gold standard fails both practically and morally. It rests on assumptions about human nature that are not only deeply pessimistic but unduly so.
What is paper money, anyway? Basically, it’s a token of legally enforceable mutual trust and has been since medieval European merchants first wrote each other bills of exchange in lieu of goods. The success of modern currencies like the U.S. dollar is a tribute to the steady expansion of such trust among citizens, which itself reflects hard-won political stability and the rule of law. Trust is good. It facilitates cooperation, community, peace — in a word, civilization.
To gold advocates, however, what matters is the undeniable fact that trust can be abused. Promises were made to be broken, and paper promises are flimsiest of all, they insist. There’s always someone — a banker, a merchant, a politician — conniving to give less than full value for money. James Madison, the ultimate realist, opposed paper money for essentially that reason. Government-issued “fiat money” is said to be especially pernicious; it lets government commandeer public wealth insidiously, through inflation.
The only protection is to make money out of scarce, indestructible metal: In gold we trust.
As Paul wrote in 1982: “The central purpose of a monetary standard is trust and honesty, not stable prices. The reason gold is superior to all forms of paper is that it provides this truth and honesty, permits and encourages savings [and] enhances economic growth.”
Paul’s apolitical honest-money scenario is chimerical, for reasons well expressed by none other than Mitt Romney in a CNBC interview in January: “I know that in the past when we had a gold standard, the idea that somehow it was detached from or free from any interference by Congress was simply wrong because even with the gold standard someone has to decide what is the conversion rate between gold and the dollar.”
Gold advocates have answers to such arguments. Paul, for one, might harden money further by ending “fractional reserve banking,” the practice whereby banks lend more money than they hold in deposits. That would make the banking system stable, in the same way that a frozen river is more stable than a flowing one.
Again, what’s repellent here is not so much Paul’s loopy assessment of costs and benefits; it’s his radical pessimism, his aggressive and indiscriminate distrust of humanity. I can see how a man like Madison would have turned against paper money, in the days of worthless “continentals” and frontier land swindles.
But now? Modern capitalism is susceptible to fraud, panic, inflation and recession, as we have all witnessed in recent years. It has also generated and distributed a fantastic amount of wealth — much of it in the years since the gold standard ended. Fiat money has, on balance, aided that development. It has expressed and promoted trust across a widening circle of humanity. To an astonishing degree, that trust has been vindicated.
As between retaining fiat currencies, while trying to reform them through democratic means, and reverting to a gold standard, with all its risks, the choice is easy. The former embraces practical confidence in human nature — the latter, the jaded mind-set of a perpetually suspicious man.