The Gold Standard: Power to the People

The gold standard is often recommended for economic reasons: to nip chronic inflation in the bud by imposing a speed limit on money creation. Politically, it also helps prevent runaway government spending by forbidding the central bank from monetizing debt. Government can still borrow, but they can’t use the central bank to sidestep the consequences of excessive borrowing that every other borrower has to face: higher interest rates. A gold standard would forbid quantitative easing. Thus, a gold standard puts a lid on the shenanigans politicians like to use for political gain. We’ve all seen the effects of leaving monetary and fiscal discretion in the hands of politicians and their appointees: chronic inflation and chronic government debts. Had there been a gold standard, government debt would have never gotten out of hand like it has.

 

There’s another benefit to the gold standard that’s less often mentioned. A real gold standard, where ordinary citizens can exchange the money they hold for gold at a guaranteed rate of exchange, means that citizens have a means to protest economic policy. Yes, a gold standard provides a new means of redress of grievances.

If Joe Sixpack thinks that his government is acting irresponsibly, running up too much debt or spending too much, he can register his protest by handing in his money and taking away gold. Back in the olden days, this right was exercised and guarded jealously. One of the main reasons for old-style suspicion of banks was bankers’ predilection for expanding deposits beyond their gold cover. No less an authority than John Adams, denounced banks as corrupt for precisely this reason.

Granted, exchanging money for gold on your own won’t make much of an impact on government policy – but that’s true of airing any personal grievance. What do you get if you complain to your Representative or Senator about a policy you think is nuts? A formal letter, maybe; nothing else.

It’s a different matter if you’re one of many. Then, you see what strength numbers bring. It’s only the numbers that got the “Taxed Enough Already” Party a hearing. Had there been far fewer of them, they would have gotten the usual brush-off.

The same strength in numbers shows up when sending the Feds a message under a gold standard. If millions exchange their currency for gold, the government’s gold reserve will shrink noticeably. Other people will notice that there’s something wrong with the spending. With the strength of millions, the government will have to stand up and take notice.

In fact, the grievance-petitioning dovetails with the usual kind allowed by the gold standard. Imagine a TEA-Party-like campaign after the gold reserve shrank, making the message sent by the conversions explicit and detailed. “It’s the Earmarks, Stupid!”

Some may object by saying that this kind of protest would threaten the financial system or the gold standard itself. That risk is only possible with a gold-exchange standard, which is inherently unstable. Some would argue that it’s a cheat’s answer to the real thing. The gold-exchange standard allows the government to issue more money than a real gold standard would permit. Purportedly more flexible than the real thing, it’s actually dangerous. It was the system the United States had in the 1920s, and the 1930s showed what damage it can do in a financial crisis. If the gold-exchange standard is taken down by righteous protest instead, its demise would be a better outcome than it meeting its end through a ’08-style crisis; which, as we know, is not made impossible by fiat money.

On the other hand, a real gold standard would limit the issue of money to no more than the government’s gold stockpile. During a wide-scale protest, the money supply would shrink because the handed-in currency would have to be destroyed. There would be no more gold to back it up, so it would have to be cancelled like a sale after the customer returns the goods. As the money supply slowly shrank, Washington’s economic planners would see the plans they made confounded by an “un-cooperative” people. An explicit protest, a regular petitioning for the redress of grievances, would give the Washington insiders the new “data” that they need to heed.

Unfortunately, due to demagogy and misunderstandings, the role of gold as a protest device has been long forgotten. Like the unpopular reformer made fun of as a “crank,” ordinary people who used this protest were made fun of back in the old days. An unknown Irish-American was the butt of this old joke: “He walks into a bank and says, ’If my money’s here, I don’t want it. If it isn’t, I want it!’” There were similar jokes about people who didn’t take Uncle Sam and his junior partner, the friendly banker, at their word. Should a gold standard expand the right of the people to petition for redress; there will be more cheap shots. There are always people who decide to think and stand up for themselves against the prevailing currents. Ask a so-called Teabagger.

An old saw claims that the gold standard would be undemocratic, as people with more money to cash in would make more of an impact. Last time I checked, neither you nor I can phone up the Treasury Department and get Tim Geithner on the line. Under our purportedly democratic fiat-money system, as we saw during the bailouts, a few can get the Treasury Secretary on the line and a favoured few can get him running. Needless to say, a TALF would be difficult (if not impossible) to implement under a gold standard. Some call the current bailout-generating fiat-money system democracy, for a reason I can’t quite figure out. Maybe it’s the Irishman in me.

What makes that demagogy gauche is the fact that all prominent opponents of the gold standard are quite comfortable with putting the ordinary person’s economic fate in the hands of Washington insiders. You don’t need to believe me: ask them. They recoil just as strongly, if not more strongly, from the left-wing answer to the gold standard: greenbackism. Putting the money supply’s fate in the hands of Congress, or in the hands of the people with a gold standard, is anathema to them.

Yes, belief in a gold standard dovetails with not trusting Washington insiders to run the economy. No wonder why so many of them take the gold-standard idea personally, as an implied criticism of them as people. Some people just don’t like to hear about their mistakes.