Why We May Never See The Gold Standard Again
Closing Thoughts: Surmounting A Mountain Of Credit
In a wonderful example, former Fed Chairman Alan Greenspan penned an insightful article titled Gold and Economic Freedom, back in 1967. In the piece, he eloquently implied what appropriate policy ought to look like and then, during his tenure as the Fed Chairman, proceeded to practice the opposite of his own preaching. Some excerpts:
“…But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”
“…When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage…The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.”
“…In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
“…Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.” (Emphasis added)
The benefits, if the world reverted to Gold, or a Commodity Basket Standard, are manifold. Primarily, it would instill a culture of controlled spending and would force capital to be directed to most productive/necessary activities. In an about turn from established culture, needs would take precedence over wants, which in today’s want-driven world would be an unwanted development. By imposing discipline on the banking system and consumers alike, it would somewhat reduce the intensity of boom-bust cycles and associated excesses. It would also curtail unbridled expenditure on enhancing military arsenal, paving the way for worldwide restraint, or a little more hopefully, disarmament.
Opposition to such a scheme, from various quarters, would be passionate and vociferous. The price to be paid for milder boom-bust cycles would arrive in the form of reduced pace of economic growth. Stability would be accompanied by a culture of discipline and restraint, rare commodities in the present world. Several important areas might also brace up for a journey to the sacrificial altar (academic/medical research with low probability of achieving socially impactful outcomes, for instance). It is likely that those whose livelihoods are tied to these professions might join the swelling ranks of opponents.
The dizzying heights of prosperity that we have reached over the past few centuries, with due gratitude to Credit, has created a view so enticing as to be impossibly hard to renounce. The opposing forces to break the inertia are nowhere in sight. The alternatives to the status quo are (a) the barter system, an extreme option, and (b) the Standard, a middle path. As governments across the world continue on the errand of infusing more credit in a system already bursting at its seams, the beautiful illusion is likely to persist in its manifestation.
Increased reliance on fiat currency would involve greater amplitudes and frequencies of boom-bust cycles. Faced with the prospect of choosing between a mutually exclusive menu of stability and moderation, and volatility and immoderation; we aspire for stability and immoderation, a wishful prospect. So is refashioning a world built around the Standard. In this tug-of-war between wishful prospects, we are likely to opt for the former.
The path of least resistance remains strewn with (more) Paper Currency.
