<<  <  >  >>

ernments of the other leading economies of the

surement system fixes a price between pints and

world before taking us down the yellow brick

quarts. The fixed relationship is a matter of def-

road alone.

inition. A gold standard defines the dollar (or

whatever the name of the monetary unit) as a

specified mass of gold. Dollars are not separate

Conclusion

goods from gold.

"A gold standard would allow Putin to

buy the United States." Any Russian auto-

Under the gold standard the issue of com-

crat's ability to use the proceeds from Russian

mon money by banks is restrained by the cost of

gold mines to buy American assets would be no

acquiring gold, which is determined by imper-

greater under a gold standard than it is today,

sonal supply and demand forces in the gold-

unless the purchasing power of gold were to

mining market. Because of the issuers' contrac-

rise. And there is no good reason to think that

tual obligations to redeem in gold, and corre-

would happen. The real purchasing power of

sponding prudential need to hold gold reserves,

gold today, under fiat money, is higher than it

the dollar volume of paper currency and

was before 1971, in large part because people

deposits--the stock of money--is geared to the

are hoarding gold as a hedge against fiat money

volume of gold. Growth in the stock of money is

inflation. The current fiat system is enriching

governed by market forces rather than by gov-

Putin more than a gold standard would.

ernment fiat. A gold standard does not guaran-

"There isn't enough gold." There is nec-

tee perfect steadiness in the growth of the money

essarily enough gold to support enough dol-

supply, but historical comparison shows that it

lars to support today's dollar price level (or

has provided more moderate and steadier

whatever price level is desired), at the right

money growth in practice than the present-day

gold definition of the dollar.

alternative, politically empowering a central

"The United States can't recreate the clas-

banking committee to determine growth in the

sical international gold standard by itself." I

stock of fiat money. From the perspective of lim-

have saved for last what I think is the strongest

iting money growth appropriately, the gold

objection to unilateral return to gold on the

standard is far from a crazy idea.

part of the United States. The nation would not

Historical problems of U.S. banking insta-

enjoy the benefits of being on an international

bility, sometimes blamed on the gold standard,

gold standard if it were the first and only coun-

turn out on closer inspection to have had been

try whose currency was linked to gold. At least

rooted in banking regulations that inadvertent-

two major benefits would be missing: (1) the

ly weakened U.S. banks. Gold standard coun-

United States would not enjoy fixed exchange

tries like Canada that avoided the peculiar

rates with the rest of the world, and (2) the pur-

banking restrictions of the United States

chasing power of gold would not be as stable.

(namely the ban on branch banking and com-

The purchasing power (or relative price) of

pulsory bond collateral requirements that

today's demonetized gold has been much less

make the supply of banknotes "inelastic") also

stable than that of gold under the 19th centu-

avoided the instability. As we discovered in the

ry's global gold standard, because demand to

greatest banking panic, that of 1929­33, having

hold gold today is largely a speculative rather

a Federal Reserve System capable of overriding

than a transactions demand. With only one

the gold standard did not eliminate the prob-

economy on gold--albeit a large economy--

lem of weakness in the U.S. banking system.

The costs of a

monetary use of gold would likely remain the

Other supposed historical problems, like

gold standard are

tail rather than the dog. Thus even in the

price deflation due to goods production out-

unlikely event that the United States were to

growing gold production, turn out not to

reasonably small

elect a president committed to a pro-gold poli-

have been actual problems.

in relation to its

cy, that president would be prudent to try to

A gold standard does entail resource costs

benefits.

cultivate similar commitments from the gov-

of mining the gold that is lodged in bank

7