One of the favourite arguments of people who prefer the monetary status quo is that the gold standard is too inflexible for the needs of trade. Like most arguments for status quos, this argument appeals to our fears. It’s not easy putting dollars in the bank account and food on the table. Many people have to fight hard for the dollars they earn. Missing a sale is bad enough: having the receipts fall because of a purportedly inflexible monetary standard is enough to make the hard-sweating tradesperson shy away from the gold standard. That’s precisely why opponents of the gold standard use that argument.
It’s about as old as that $10 gold coin. Back in the days when the gold-exchange standard was pushed, “needs of trade” was one of the arguments advanced for it. A gold-exchange standard, so it was held, would lead to an “elastic currency” that would bend and stretch with the needs of trade. So much hope and belief was invested in it, the theoreticians couldn’t admit that the gold-exchange standard was a bad idea when the elastic broke in the 1930s. Instead, gold itself was blamed and they either defended the gold-exchange monstrosity or stood silent. When the choice was between admitting to a mistake and turning on gold, they – in many cases reluctantly – ended up turning on gold.
Now that fiat currency has worked its magic for forty years, we see the same refusal to admit to a monetary mistake. The gold-exchange standard was supposed to eliminate recessions; it caused a Depression. The flawed Bretton Woods system was supposed to bring price stability to the world; it didn’t. Fiat money was supposed to bring long-term price stability with flexibility in combatting recessions, just as Keynesian demand management was supposed to cushion recessions while keeping the budget in balance over the business cycle. Instead, we have permanent inflation and seemingly permanent budget deficits. As for eliminating recessions…how’s that working out for you?
A rational person would see the entire world was on fiat money in ’08, and conclude that gold was in no way at fault. Fiat money is the new and universal orthodoxy. The gold standard is now an alternative, one with a solid past but still heterodox.
Fiat-money apologists don’t blame gold for the latest crisis: they’re not that shameless. But they can’t stop criticizing the gold standard; they need to. If they stopped, they would veer into asking themselves if they got the money thing wrong. Like their predecessors in the gold-exchange-standard days, they just can’t do that.