Gold Standard Goblins

I am always fascinated by how many errors can occur in one article. This one by Gregory Hilton may just have moved to the top of my list. Rather than tackle all gazillion errors, let’s focus on the main one.

Hilton viciously attacks the gold “standard” as a flat-earth type of theory, one that made sense long ago but belongs in the trash heap of failed ideas. His analysis is flawed for any number of reasons, but the most egregious is a failure to specify what he means by “gold standard.”

There are any number of gold standards, the main three being gold specie, gold exchange, and gold bullion. They differ in important respects, but the common theme among them is that an authority designates the value of money in some way linked to gold. However, gold is not, in its origins as an exchange standard, a governmental creation. Gold was valued long before it was coined. Coinage merely made a certain kind of gold “legitimate” for trade–usually that issued by the government. Since it is relatively easy to determine the weight and purity of gold, the symbols stamped on coins are unnecessary, though convenient. Gold would still be what it is in any form that can be assayed easily.

A gold “standard” has all the same problems any government action does–it relies on the wisdom of the anointed few. Elected officials have not generally been noted for their ability to make sound judgments, fiscal policy especially. They have every incentive to spend money to create the illusion of prosperity and so will advocate any system that gives them leverage to do that. Hilton correctly notes the a gold standard will not prevent this.

What Hilton fails to understand is that there need be no “standard” at all. Money can be treated as a good just like any other. Advocates of free banking, in fact, suggest that banks should only be subject to laws applying to all businesses–not committing fraud, for example. Consumers would determine which money is sound in the same way they check whether a melon is ripe or a locksmith is trustworthy. Bad money would be out-competed by good money.

There are several nuances to the free banking issue that we cannot cover today, but the gist of it is whether citizens, the actual users of money, determine its value or politicians, who have every reason to force bad fiat money upon us. Blessedly, the ability for the government to dictate to us what we shall use as money is limited, not by law, but by the will of the people using it. If the dollar were to crash today, no amount of coercion by the government would keep people from exchanging value with one another by other means. The question is whether our leaders will recognize this limitation before a disaster occurs. I have my doubts.

 

 

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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