How To Criticize The Gold Standard

We’re all experts on gold

So, a mention of a gold standard commission and all of a sudden everyone is an expert on the gold price and the metallic standard.

Or so they think.

The last fortnight or so has been full of various articles, discussions, debates and op-ed pieces all about the gold standard. Everyone has an opinion. It feels as though some have gone into a blind panic, desperate to persuade voters and observers that the gold standard is a terrible idea. In the rush they fail to present factually correct arguments and in some cases just mock those who think a return to sound money will be no bad thing.

Below we provide a guide to arguing against the gold standard.

1. Mock the weak

The standard approach to criticising it goes as follows:

Make anyone who is remotely likely to look further into this idea feel stupid. Those interested in gold are made to feel as old-fashioned and deluded as ‘"flat-earthers."

For example: Neil Collins in the FT writes, "the Republican delegates have taken a sentimental journey this week, proposing a commission to look at restoring the link between the US dollar and gold," or Ambrose Evans-Pritchard, of the Telegraph, who writes "Some gold bugs – though not ones with historical memory – seem to have greeted Republican talk of a renewed gold standard with near ecstatic delight. They need their heads examined."

Make anyone who is still interested in the idea feel even more stupid by making them feel as though they should know more about this.

For example, Jeff Reeves of InvestorPlace.com says "Everyone who understands anything about macroeconomics knows these ideas are at best impractical and misguided," whilst Evans-Pritchard states, "Anybody who has read Barry Eichengreen’s 'Golden Fetters' knows what happened [in the late 1920s]." Yes, because so many Telegraph readers have an Eichengreen on their bookshelf. Meanwhile Krugman just says "anyone who believes that the gold standard era was marked by price stability, or for that matter any kind of stability, just hasn’t looked at the evidence."

The key here is to talk yourself up whilst talking the gold standard down. Few will have looked at the evidence, few will have read an Eichengreen book (I have) but by pretending you think they have, they will feel as if they you know more than they do and (hopefully) trust you.

2. Be vague on history

Consistently critics refer to "the gold standard" and the price instability seen "in the gold standard" and the crises seen "in the gold standard." There was never one gold standard, in modern history there were three. With each one, government and federal interference grew and with that came all the issues critics love to cite.

By lumping them together, the whole gold standard seems much scarier and can be blamed for many more things. There is no point mentioning the creation of the Federal Reserve in 1913, the return to the gold standard at the wrong parity in the interwar period by Churchill or the on-going volatility thanks to Fed incompetence.

3. Use contrary indicators

Let’s be honest, asking Chicago school economists about the gold standard is like asking a group of vegetarians if everyone should be made to eat meat four days a week. The answer is predetermined by their beliefs; there is little point in asking them unless the answer they are guaranteed to give suits you. But it does suit the argument against the gold standard, and perhaps not may people will ask why no Austrians have been quoted in your article.

4. Ignore the obvious

Actually, this isn’t the only reason, but we’ll look at it anyway. Inflation, argue the fiat lovers, is not an issue, ‘since the June 2009 end of the recession, the average increase in the index has been 1.8% below the central bank’s 2% target’ argued Bloomberg. Right, so the Feds have a target for inflation – but there is no inflation?

We’ll let Detlev Schlichter take it from here: "From 1997 to 2007, that is, the ten years that preceded the start of the present crisis, house prices in the US appreciated 3 times faster than in the preceding 100 years. We had drastic asset price inflations and various asset price bubbles around the world over the past 25 years, plus explosions in general indebtedness and massive bank balance sheet expansions, and these inflations set us up for the present crisis…But I guess, as long as a pint of milk in the supermarket only goes up by 3% a year, there is ‘no significant inflation’…”

5. Scare everyone

Currently we see some volatility in the gold price. Therefore, we would see fluctuations in our currency. Yet gold is priced in fiat money, dollars. The changing prices tell us more about the volatility and instability of paper money than they do about gold. But there is little need to explain this.

The notion that state-controlled fiat money is a more stable unit of purchasing power does in fact go against both history and theory. It is an oft cited, historical fact that commodity money consistently operates as a reasonable medium of exchange. However, it is difficult for us to come to terms with the idea that external shocks are not "unrelated" as often explained, but in fact "related" and intrinsic to the fiat system.

A gold standard is deflationary, which is a death sentence for the economy.

An inflexible commodity standard is likely to see on-going price reductions in the production of good s and services when the economy is growing. Whilst there is little evidence that this is a problem – see the Industrial Revolution – and it has many advantages, it sounds scarier.

It is hard, too hard, for us to get our head around the idea that we do not need more money in order to grow an economy. We can just ignore the fact that Zimbabwe isn’t the wealthiest and most prosperous nation in the world. Perhaps "positive inflation" as Bernanke calls it is better than deflation.

6. Whatever happens, don’t strive from the norm

A tricky one because this is why there are calls for the gold standard. They argue government and central bank interference is a bad thing. Aside from the most frequent and prolonged financial crises being seen since 1971, the "regulated" banking system manipulating everything and the loss of purchasing power in all major currencies, this is an empty argument.

The last 50 years or so has seen us become more reliant on government. We need money to get through day to day lives, what’s better than having government control it? The thought that they and central banks may not actually be able to fix this crisis, or future ones with injections of monopoly money and further spending is a difficult one. Best not to cause a panic. Paper proponents are panicking

So there you have it, the complete guide to criticising the gold standard. But is it enough to stop people questioning why unemployment is so high? Why the value of their savings is dropping? Or why the banks keep needing bailouts?

No matter how much you try and hush something up, people will always ask questions. They may not ask if we should return to the gold standard but they will start asking where our monetary system went wrong, and then it is only a matter of time before they find the truth.

The criticisms of the gold standard have come out in full force this last fortnight. They refuse to look at the on-going work of the standard’s proponents which has been around longer than they’ve been writing. Instead, their education has set them up in good stead to just "know" that the gold standard is worth mocking and absolutely should not be returned to, even if it means using contrarian evidence against it. In the words of Jim Rickards, we are “entitled to our own opinions but not to our own facts.”

Should we return to a gold standard? That’s a question for another day and several articles. We liked the way Douglas Carswell MP answered it: "Will we return to a system of gold-backed money? I don’t know. But unlike many of the expert pundits, I know that I don’t know.”