The Rise and Fall and Rise of the “G”-Word

Leave the fire ashes; what survives is gold
       — Robert Browning, Rabbi Ben Ezra

It’s the “g”-word. It’s the word that everyone almost says, and then doesn’t, because saying it can make you sound like a little like a loon, or maybe more like a combination of a train spotter and a conspiracy theorist, with an Austrian economics overlay for luck. It’s “gold”, of course.

Of late, however, gold has actually provoked some thoughtful discussion, at least insofar as imagining what might be different in the current crisis if modern currencies, especially the dollar, were tied to gold (or something like it) in a fixed ratio. For a thoughtful example, check the following sent to me today by the folks at QB Partners. Agree or disagree, at least the case will have been made.

…the notion of multiple subjective global monetary policies managed by unitary policy makers seems anachronistic. Fiat currencies allow sovereign governments and their central banks to issue as much paper currency as they wish, as long as merchants, consumers and trading partners are willing to accept that paper in return for goods, services and assets. Because various nations have different growth rates, as well as differing social, economic and political agendas, it follows that subjective domestic monetary policies and the absolute and relative purchasing powers of their attendant currencies are highly unstable and, in many instances, inordinately unfair.

Maybe the US dollar – or whatever form of money the world chooses to have as its reserve currency in the twenty-first century – should revert back to the gold standard? A gold standard is a quaint idea inasmuch as the theory of relativity is a quaint idea. Nothing has changed in the current global economic environment that argues against the legitimacy, flexibility and practicality of re-adopting a currency anchor – not the size, divergent interests or sophistication of global economies, banking systems and capital markets.

The common fear that banking systems could extend only limited credit under a gold regime is fallacious. There is plenty of gold – at the right gold price – to peg paper money to it. As long as fractional reserve banking systems exist, money and credit growth would be limited only by natural economic forces – not by rigid formulae. Neither is re-anchoring currencies to gold a partisan issue, as is so often thought. The healthy tension surrounding free market control and the distribution of wealth would remain in the political sphere, to be argued by liberals and conservatives.

Within all nations, it is the peoples’ collective wealth – earned from innovation, natural resources, labor and productivity – that their central banks attempt to optimize. Central banks throughout history have spotty records of doing this. Politicians across the political spectrum are equally critical of the limitations of a subjective central banking system capable of promoting violent economic booms and busts, which may threaten the very viability of their nation. The question of fairness within an economy – the manner in which collective wealth is concentrated, distributed or re-distributed – is a separate matter with a different pathology from employing a gold peg.

Gold-backed currencies require fiscal and trade discipline among all constituent economies – not necessarily rigid mandated controls. A nation that runs a persistent trade deficit, for example, would find gold leaving its vaults for those of net-exporting nations. This would prompt one of two responses by the indulgent nation: 1) tighten domestic monetary policy which, all else equal, would lessen demand for imports and lead to a rebalancing of accounts or, 2) adjust its fixed exchange rate downward, which would hinder its relative terms of trade with other nations (the overly indulgent nation’s exports would become relatively cheaper while goods it had been importing would become more expensive). These disciplinary dynamics work naturally to rebalance trade and capital flows and to encourage domestic economic sustainability and fairness among trading partners. This is timeless theory (straight from Adam Smith) and would be very practical today.

Read the whole thing here.

Of course, nothing is truly new under the economic sun, as this piece from Time back in 1979 makes clear. Read it for more context on gold’s fashionability in crises.