The extent and persistence of the global economic and financial crisis has caused many people to start asking if there is any alternative to the current monetary system of fiat money overseen by central banks which enjoy varying — and apparently diminishing — degrees of independence from politicians who seem unable to resist meddling with monetary policy in pursuit of short-term goals (such as their reelection).

Most arguments about the respective merits of fiat money, private money, or the gold standard are couched almost entirely in terms of economic efficiency. Over at Public Discourse, however, Acton’s Research Director Samuel Gregg has penned an article outlining the principled case for a return to the classical gold standard. Gregg draws upon economic history and ethical analysis to argue that there is a strong more-than-economic case for the classical gold standard that rarely receives much attention. As Gregg writes:

There were several economic advantages to the gold standard. . . . A number of principled considerations were, however, also operative. The gold standard placed a high premium on economic security by reducing the uncertainty and risk that flows from fluctuations in the value of money that have nothing to do with the relative valuation of different goods and services. . . .

Another commitment at stake was the conviction that stable money meant greater economic prosperity for increasing numbers of people. Greater monetary certainty spurred productivity and investment, not least because many long-term contracts benefited from a confidence that prices would remain relatively constant over time. Then there were the ways in which the gold standard bolstered the economic well-being of particular marginalized groups. Monetary stability helps, for example, those who lack the financial sophistication to navigate the shoals of inflation, or who are on fixed incomes (e.g., the elderly and disabled).

At the same time the gold standard also encouraged governments to promote the common good instead of narrow sectional interests. Within nation-states, for instance, the gold standard diminished opportunities for the state to manipulate monetary policy in order to favor those with an interest in inflationist policies.

Likewise, the gold standard also generated a commitment on the part of governments to promoting the international common good. As the German economist Wilhelm Röpke once wrote, the gold standard relied upon the unwritten agreement of central banks and governments “to behave in matters of monetary and credit policy in such a way that this fixed and free coupling remained an undisputed permanent institution, irrespective of trade fluctuations”. This required central banks and governments to prioritize the global economy’s long-terms needs over the short-term exigencies of national economies. It also entailed a willingness to resist popular pressures to revert to a type of monetary nationalism in the face of the fluctuations in employment and growth sometimes generated by the gold standard’s adjustment mechanisms.

There is, Gregg notes, bound to be considerable opposition to any move away from fiat money. It’s hard to imagine, for instance, politicians, central banks, or Keynesian-inclined economists being very willing to give up a tool that — or so they believe — is a vital element of macroeconomic management. Gregg points out that there are also plenty of groups with a vested interest in the type of easy money policies (what’s euphemistically called “quantitative easing” these days) which are always an option under fiat money regimes.

Despite this opposition, Gregg says that going back to gold is certainly worth a second look — if only because no one seems especially satisfied with the present system.

For more from Gregg on this subject, see The Gold Standard: A Principled Case.

  • Roger McKinney

    I like the article, but the problem isn’t the money; it’s credit. Mises pointed out this mistake in the thinking of the Manchester school. They thought that only the creation of paper money caused inflation. Mises pointed out that credit expansion does most of the damage. Credit will always expand as long as fractional reserve banking lives, even with a gold standard for money.

    Gregg’s article is good and I agree completely, but I wish he would go into ethical problem that price inflation, caused by credit/money inflation, is a form of theft. It steal the wealth of people because it takes that wealth without their consent and most people don’t even know it’s happening. And it takes from the poor, who get the new money last, and gives to the rich, who get the new money first, before prices rise.

  • Bill Huneke

    Problem with a gold standard is that it is inherently deflationary. As the economy grows, there are more goods & services but the money supply does not grow. Prices fall.

  • Roger McKinney

    Bill, actually the stock of gold does grow. Even today it grows at about 3% annually. Gold production is higher when its price rises.

    But even if mild deflation did occur, that’s a good thing. Inflation steal from workers and gives to the wealthy and the state. And it causes a lot of other problems in society, too. Mild deflation due to a slow growing stock of money would encourage savings, while inflation discourages it. Deflation would help workers because their wages would fall at a slower rate than prices.

    A sudden transition to deflation would be devastating to people who had borrowed a lot, but once they worked through the damage, a mild deflationary economy would be wonderful. People would be inclined to save to buy things or build companies rather than borrow. The financial services industry would shrink dramatically in size and importance to the economy. As a result, business cycles would almost disappear. Wealth would soar!

  • James Kraai

    Along the same lines, the defined benefit pension programs have the same issue at their core. Fiat inflatable money supports politicans who make unrealistic pension policies/promises that they have no reasonable way of guaranteeing. The decision made today have lasting effects over many decades.

  • http://www.radiofreemarket.com Andy Katherman

    As Rothbard and other have outlined, any “money” has to originate as a commodity within society first. We see that Gold does this with people (even today) using it as a store of value as jewelry. Why do people buy wedding rings made of gold? Because it has value. Paper money originated as money substitutes for redemption on demand as warehouse receipts. Like farmers who store grain in grain elevator, they would be issued a certificate or note to redeem their commodity upon request. “What Has Government Done to Our Money” is something that really helps layout the case for sound money and the history of what has happened to money over time – thus leading to our current fiat paper money era which will have horrible consequences over time. Legal Tender laws are really the root of the problem as outlined by “Gresham’s Law” in which bad money chases out good (specie).