BY JAMES P . PROUT
The Gold Standard : Retrospect and Prospect
Edited by Peter C . Earle & William J . Luther
AIER , 2021 328 pages with notes , bibliography and index . $ 18.00
“ Gold standard ” has a certain ring to it , doesn ’ t it ? Class and confidence and solidity . Every good or service is measured against its unalloyed quality . And when it comes to describing a country ’ s monetary or currency system , the “ gold standard ”— where the amount of currency in circulation is related to the volume of gold held — sounds a lot better than “ fiat currency ” or “ bi-metallism ” or “ dollarization ” or “ cryptocurrency .”
In the United States , our monetary system has had a love / hate relationship with the gold standard since the country started . Sometimes official , sometimes not . In 1896 , a major presidential candidate likened the gold standard to a crucifix . In 1971 , none other than Richard Nixon decided that the United States ( and hence the world ) needed to move on . Dollars were no longer pegged to or redeemable in gold . From that day forth , the Federal Reserve would decide the supply of money based on standards set in its charter , and on its analysis of present and future economic needs .
Is this a good idea ? Or would we be better off returning to the gold standard , or some other reserve system ?
Those are the central questions posed by The Gold Standard : Retrospect and Prospect , a collection of papers which explores and discusses the gold standard ’ s past and future . The book is published under the aegis of the American Institute of Economic Research . While it is clear that the contributors have a hankering for the gold standard , it isn ’ t a jeremiad , but a sincere attempt to educate and foment discussion on how money is viewed and valued .
There are many misconceptions about the gold standard in the United States , and the book ’ s opening chapters try to set the record straight . As barter waned , money ( more portable !) became the default method of exchange . Different metals were used in coinage , but after a while gold and silver became the standards . Then came paper money . For most of the 1900s , paper currency was informally linked to gold and silver , until Britain officially pegged the pound to a set amount and quality of gold . When the United States finally established a central bank in 1913 , the dollar , too , was valued in relation to gold . In 1933 , FDR temporarily suspended the gold standard . But when the dollar was made the world ’ s reserve currency at Bretton Woods , the gold standard returned for its final act . And then Nixon came along : Gold Standard , RIP .
What drove the gold standard ’ s attractiveness , argues the next chapters , was its ability to provide stability . The most important measure of this stability was the purchasing power of money . Gold supply had transparency , and actors could make decisions on the value of any currency pegged to the metal . Gold also had an auto-correct mechanism , since gold miners could produce more gold when it became dear , and put it to other uses when too cheap . This led to longerterm confidence in contracts and lessened the effect of inflation or deflation . The authors admit that 50 years or so of an “ official ” gold standard ( 1913 – 1971 , minus war years ) is a relatively short period to measure effectiveness . But for discussion , they argue that enough data exists to show that growth and economic progress were as good or better than today ’ s approach .
Critics of the US or any gold standard are numerous and well known — from William Jennings Bryan to John Meynard Keynes to Paul Krugman . The editors give time to these criticisms . Examples include : it is a ridiculous reliance on mined metal , there is not enough gold in the world , gold prices and supply are volatile , the deflationary impact is too strong , the system is too rigid , the world won ’ t go along with it , it is too expensive , etc . All of the arguments are cycled through . Not surprisingly , while interesting , the authors conclude they are not insurmountable . The existing system of “ fiat ” money could work , they admit , but is unreliable because constraints are often jettisoned by monetary authorities at the first sign of economic discomfort .
The book is well-ordered , and the essays are , by and large , clearly written , or as clearly written as economic papers tend to be . The arguments against the gold standard are what we call in the law , “ straw men ,” weakly presented and designed to be swatted away easily . They should have been presented by a full-throated and energetic economist who opposes the idea . There are many . Miners play a continuing role in the supply of gold — part of the auto-correction mechanism — but there is no discussion of how mining has changed dramatically , and how supply might be manipulated in the hands of a few corporate or national operators .
The Gold Standard is an academic book , but it is worth the time and effort to read . The penultimate chapter on cryptocurrency is particularly enlightening , and I commend it to anyone . As I write this , the Fed has decided that free money has to end . Inflation is running at a 40-year high . Does this mean that the gold standard should return ? Or is it a “ barbarous relic ”? Up for discussion , I suppose . But just remember that the US Federal Reserve still holds gold — lots of it — 50 years after the country ended the standard . So who is hedging their bets ?
James Prout can be reached at jpprout @ gmail . com .
38 FINANCIAL HISTORY | Winter 2022 | www . MoAF . org