Social conservatives often decry the evaporation of “family values” or some other type of moral criterion as the seed of all of our present problems. Progressives, on the other hand, point out the growing income gap and the declining purchasing power of American laborers as a moral failure.
A monumental issue, one that I believe underlies any discussion of moral values, is the corruption of economic value through inflation and reckless government monetary policy happening outside of any democratic process.
Having lived our whole lives under a fiat currency, our generation tends to forget that at certain points in this nation’s history, American money was backed by a fixed amount of gold. The exact amount of gold and the exchangeability varied over time, but in 1971 Nixon removed us from any connection to a reserve of gold whatsoever. Gold and/or silver as currency have the whole history of human exchange to suggest that they maintain value in and of themselves over time. Fiat paper money, on the other hand, is entirely an abstract idea, based on confidence in the American economy.
Perhaps the more crucial point here is that having a fiat currency allows the Federal Reserve to print money at will and the government no longer finds itself constrained by a spending limit dictated by governmental reserves of gold. The Founding Fathers were well aware of the nature of fiat money due to several episodes of its issue in the colonies. For this reason the constitution specifies that only gold and silver can be currency.
This disconnect from an actual value inherent in money, combined with economic theories that hold moderate government debt as a healthy economic variable, have over the last several decades led us to the position that we now find ourselves in. Not only are we straddled with a debt that threatens to equal our gross domestic product, but the value of currency in terms of goods steadily, and without fail, erodes over time as more money is created to fund government largesse.
The whole point of moral codes is that they find expression in individual agents. Constant inflation erodes individual moral potential by constantly, and without fail, chipping away at whatever bit of agency an individual can accumulate in the form of currency, which is embodied economic potential.
Therefore, to avoid one’s savings dwindling to nil, the moral actor is forced to buy into the inflationary economy at large, seeking speculative interest-bearing opportunities instead of the old-fashioned method of growing one’s savings over time. His or her entire moral imperative is undercut proportionally to the debasement of currency occurring constantly in the unelected Federal Reserve and the concomitant deficit spending of our government.
We can’t truly value things in the moral sense unless we have a true sense of their relative difficulty to bring into existence, and thus their economic value. The speculative world we live in gives individuals no genuine way to gauge value, and it is no small wonder that we find ourselves carried on a sea of uncertainty.
Returning to a gold standard would limit social welfare spending to what is actually affordable. It would render impossible the current form of accounting that allows politicians to creatively reallocate funds to hide bloated expenditures – for unnecessary wars, crony-ist concessions to vested interests and other wasteful and dishonest expenditures.
It’s not a question of whether social welfare is right; any moral code worthy of the name protects the weak and the infirm. The real question is: if we took away the government’s ability to recklessly spend and devalue our currency, wouldn’t that leave more value and agency in the hands of actors that have been proven to be trustworthy in carrying out this mission, such as charities, mutual aid societies and insurance agencies?
Gavin Beeker is a Collegian Columnist. He can be reached at [email protected].
Logan • Feb 11, 2012 at 11:34 pm
Nice job, Gavin. If the U.S. monetary policy continues the way it is today, don’t worry — the U.S. will ultimately be forced to return to a gold standard under the “New Dollar” after the current dollar blows up when the U.S. defaults on its debts. It will be an apocalyptic experience, for sure, but we’ll all be better off in the long run earning our hard-earned incomes and setting aside our savings under a stable currency monetary policy.
Harrison Searles • Feb 7, 2012 at 9:10 pm
“As for Harrison (and I know you have thought this deeply and are knowledgeable on the subject) are you truly arguing that stochastic markets determining the worth of gold are more stable than a decision by policy makers regarding the money supply?”
The stochastic markets determining the worth of gold resulted in an extremely stable price over the course of Bretton-Woods; this was also the case during the international gold standard from 1870-1914.
To think that the price of gold would behave as it does in today’s markets in a gold standard is unsound because of the fact that within a monetary system pegged to gold, the metal would be valued mostly for its monetary uses. As what happened during specie standards of all kind in history, the set price of gold would be stable because it would always be possible to exchange gold from the treasury at the treasure for its price in say dollars (I assume here that we would have a gold-exchange standard, but since all gold standards since the 1870s have been gold-exchange standards, I think the assumption is warranted). If the price of gold falls below the set price, then entrepreneurs would sell their gold to the treasury in order to make a profit and vice versa when the price of gold is above the set rate. As a result, the gold standard by the treasury’s operations has a mechanism for ensuring the stability of the price of gold.
As far as the question of being more stable than the decisions of policy-makers, my answer to that is of course! There is no reason to suppose that policy-makers will keep the value of each dollar stable. This comes from both the historical record, moneys not tied to commodities have historically always trended downwards, and because of the fact that policy-makers are never charged with keeping the value of money stable. To the contrary, they are either given the mission of ensuring full employment, or ensuring price-stability. Why the first is true is quite obvious, conventional macroeconomics recommends devaluing money during times of recession to stimulate investment and bring the economy back to full employment. The second is also true, but less obviously so because of the fact that the price-level is naturally decreasing due to the productivity norm. As production becomes more efficient, which it tends to do under capitalism, each unit of money would be able to buy more. In order to keep the price level stable, central banks then have to devalue the currency in order to counteract the productivity norm.
The gold standard would simply be a better choice for a currency-regime if our desideratum is to have a stable medium of exchange. A virtue of the gold standard is that it is inelastic.
“Fight inflation?”
Already answered, due to the productivity norm and the stable value of gold under the gold system, there is no need to fight inflation under it.
“How would the government implement quantitative easing?”
One of the entire points of the gold standard is to tie government’s hands with respect to monetary policy. There are two options under the gold standard (assuming that the nation is playing by the rules, which did not happen after 1928 – see France’s purchase of gold during that time): buy or sell gold, both of which must be aimed at ensuring the stability of the price of gold at the pegged amount. Rather than having bureaucrats consistently mess up the response to recessions (When has the Federal Reserve ever done a good job with counter-cyclical policy? Short answer: it hasn’t.)and the uncertainty that goes with that, monetary policy will follow rules allowing entrepreneurs to adapt their future decisions to them. Furthermore, there will be far less interference with economic coordination coming from injections of credit due to central banks’ policies lessening the need for countercyclical policy. And when there is a recession, the economy will have to recover the only sound way: by matching the demands of consumers with the supplies of producers without the discoordinating effects of monetary injections.
“Purchase foreign reserves?”
Simple: they buy foreign monies. Under an international gold standard, there would be no need for foreign reserves since gold would be fungible to other monies. Under a unilateral gold standard, the treasury would simply buy foreign monies as a good. I trust if the American dollar were defined in gold, that the British pound would have a price in gold or the Japanese Yen the same just as the fiat American dollar has a price in terms of gold today.
Ben • Feb 7, 2012 at 4:15 pm
> For this reason the constitution specifies that only gold and silver can be currency.
Gold and silver aren’t mentionioned in the Constitution, except to say that states can’t make anything else into currency.
Ash • Feb 7, 2012 at 2:05 pm
I expect infinite economic growth forever. This is of course assuming that we can continue expansion beyond earth, but humanity has no reason to stop progressing, constructing, and consuming. Do you really think that society will stop at one point?
As for floating the value of gold? Why bother? Why not use paper? Gold is worthless, it looks pretty and there is no clear reason as of yet to why gold was chosen (though the answers seem pretty clear, it was hard to counterfeit, could be regulated, and was valued by people for no reason, sort of like money). I’d take a gun and bullets over lead, trust me, it will enforce morals way better than gold ever would dream.
Why is gold desirable? It is a fiat currency in a sense. It looks pretty, thus people trust it. It has no useful backing, you can’t eat it, it’s an awful metal for most everyday use, and like I said before, lead is far better. Hell, even scrap metal is.
As for manipulation and money supply, check what side you’re on. The money supply is inherently important to ensuring economic stability, hedging interest rates and numerous other things. Check the rates of growth for the best growing economies, then check to see if the gold standard was still in play. The gold standard is, and should be, dead forever.
As for Harrison (and I know you have thought this deeply and are knowledgeable on the subject) are you truly arguing that stochastic markets determining the worth of gold are more stable than a decision by policy makers regarding the money supply? How many exogenous variables are used in determining the value of gold that are not relevant to the markets? Computer chips are a huge consumer of gold, but should that impact the inflation rate more than food production? Would gold be subject to futures markets, or would it be removed?
Other questions: How would the government implement quantitative easing? Fight inflation? Purchase foreign reserves?
Harrison Searles • Feb 7, 2012 at 10:55 am
“Do commodity markets not fluctuate? Is gold not experiencing a tremendous bubble right now? It is not 1500?”
Commodity markets are a lot more stable than the printing press. Furthermore, during the gold standard, the price of gold was extremely stable, and it was stable due to the incentives that the gold standard made for minting gold.
“The gold standard forced countries into devastating wars (see the entire history of Europe until they removed themselves from the gold standard).”
Name a war that started from the gold standard. Seeing that it only has a two hundred year history, being first pioneered by Isaac Newton as Master of the Mint in England, the amount of wars you have to choose from are sparse. Plus, the most devastating war in European history, the Second World War, happened after Europe had removed itself from the gold standard.
“The only way to grow under a gold standard is to go get more gold, to literally steal it from somewhere else.”
This is absurd. Gold standard economies (i.e. the vast majority of the world from around 1870-1914) have grown just as any other economy: by innovation and improving the efficiency of production. Furthermore, under a gold standard, just getting more gold creates inflation which is not to the benefit of economic growth.
“We don’t need a mercantalist economic system.”
See above, was the world in 1870-1914 under a “mercantalist economic system?”
zacfoo • Feb 7, 2012 at 10:39 am
Ash,
Some questions for you:
When do YOU expect “infinite economic growth”?
The last time we experienced anything close to “infinite economic growth” was during the antebellum when we were on a gold standard? Please explain very healthy economic growth while under a “finite currency” and why you don’t think that economic law is absolute (IOW, why you believe that it cannot happen again).
As to gold being “finite”, is there any law that prohibits the valuation of this currency (gold) to be set by the market, and mandates it must be pegged by a government? Must it be the traditional “gold standard” or can it be a freely-floating market-priced gold standard? Under a floating gold price, it doesn’t matter the amount of gold in the vaults, what matters is the valuation of a set weight of gold? If economic growth is significant, the value of the gold increases, not necessarily the amount of paper “gold credits”.
Gold is not simply a commodity. It is money and has been for well over 3000 years. It is rare, durable, divisible, and desirable. Can you say that about paper, or any fiat currency?
The “bubble” that you ascribe to gold is nothing more than the paper price affixed to it, as any bubble is. Is this bubble not more of a reflection on the paper (which supply is increasing under QE and runaway FED manipulation) and not of gold (which supply has been relatively steady)?
Your argument rests on the assumption that paper is immune from manipulation, yet that is all that paper currency is good for: manipulation. Why do you think that the 20th Century (and so far, the 21st) was a century of massive expansion of government power, warfare, welfare, etc. They could do and promise whatever they wanted because they weren’t held in check by a finite money supply.
I agree with and applaud the author: Gold is economic morality. Bravo!
ktabz • Feb 7, 2012 at 10:13 am
Why limit ourselves to gold? We can use any commodity. Maybe we should tie our currency to the supply and demand of bananas.
The gold standard forced countries into devastating wars (see the entire history of Europe until they removed themselves from the gold standard). The only way to grow under a gold standard is to go get more gold, to literally steal it from somewhere else. We don’t need a mercantalist economic system.
It’s a libertarian dream but it’s an antiquated idea with more problems than benefits.
Ashamed • Feb 6, 2012 at 11:36 pm
So you want to peg infinite economic growth by a finite currency? Do commodity markets not fluctuate? Is gold not experiencing a tremendous bubble right now? It is not 1500? Any question above is a viable one to point out how there are more holes in the argument than the Iraqi navy.