It was the late novelist and philosopher Robert Anton Wilson who said: “Convictions make us convicts.”
It’s a generalization. Some convictions are timeless. But there are many convictions that people cling to despite decades of mounting evidence to the contrary. Among that group are people — including at least one presidential candidate — committed to going back to the gold standard because they believe it to be the elixir that will solve all of our economic problems.
Yes, there are shiftless peddlers of gold who tout the yellow metal as the only meaningful asset in a post-apocalyptic economy. These are hucksters. These are not the people I’m writing about. I’m referring to those who continue to ignore stubborn facts, such as that the Great Depression came to pass while an international gold standard was in place, or that a recent poll of economists found precisely zero support for the restoration of the gold standard.
Why gold? Wasn’t that an arbitrary selection right from the beginning? Why not tie the money supply to oil, or water, or phosphates, or paper for that matter?
What if there were a major gold discovery? Does that mean our money supply is suddenly greatly expanded? Do we suddenly experience hyperinflation in that event?
If there is no major gold strike, one would assume the money supply is always limited by the fixed supply of gold. But as productivity and the wealth of nations rise, shouldn’t the money supply and the riches shared by expanding middle- and upper-classes increase? Isn’t some degree of inflation a byproduct of a healthy, vigorous economy?
Still, advocates of the gold standard argue it would eradicate the boom-and-bust cycles we experience, reduce the risk of recession, and restore living standards and long-term price stability.
Detractors call the gold standard a “solution in search of a problem.” Critics worry that gold, as a backing for our currency, would eliminate the Federal Reserve Bank as a mechanism for beating back high inflation by shrinking the money supply and putting downward pressure on prices, or fighting recession by expanding the money supply to stimulate consumption. Indeed, the Atlantic magazine cites the policy’s inflexibility as the major cause of the Great Depression, as governments were forced to operate with a tight money supply at the worst possible time. The magazine also argues it was not coincidental that the sooner a country abandoned the international gold standard, the sooner it began recovering.
Even most gold enthusiasts have given up on the idea that the dollar should be tied to gold. National and global currencies are metaphysical, in a sense. A currency’s value rises and falls based largely on faith. Consumer and business confidence play vital roles. Money is as meaningful as we believe it to be. There is a mystery of faith that surrounds and influences the value of any currency.
Most transactions don’t even have anything to do with metal coin or paper currency anymore. They are electronic pulses moving through fiber-optic cables or wireless networks. Money moves with a velocity that was unimaginable just decades ago.
It’s clear there are some convictions we must surrender. Count the gold standard among them.
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Mike Consol is editor of Real Assets Adviser.
