The lawmaker behind the state's push for gold explains why he's worried about the dollar's demise
It's not everyday that a U.S. state starts planning for the demise of the dollar. Today is apparently that day for Virginia.
Despite sub-2 percent inflation right now, state lawmakers are worried the Federal Reserve's expanding balance sheet could eventually stoke Weimar-style hyperinflation and want to prepare for the day after such Mad Max monetary mayhem. As Ylan Mui of the Washington Post reports, Virginia's House of Delegates recently passed a bill calling on the state to spend $17,440 studying the feasibility of returning to a metallic money standard should Fed policies or cyberattacks obliterate the value of the dollar.
In other words, they want to bring back everybody's least favorite barbarous relic: the gold standard. Now, as far as zombie ideas go, the gold standard is, well, the gold standard. It's not even a solution in search of a problem. It's a problem in search of an even bigger problem. Pegging the money supply to the supply of gold prevents central banks from creating money at will -- that's what its advocates like -- but printing-press-fueled inflation isn't our problem nowadays; the opposite, actually. Inflexibly tying credit to the amount of shiny rocks we can dig up risks leaving us with too little credit when we can't find enough shiny rocks -- and hence turning recessions into depressions due to too-tight money, like in the 1930s.
But some people think the certain costs of a gold standard are preferable to the uncertain costs of quantitative easing. People like Virginia representative Bob Marshall, who sponsored the bill. I emailed Marshall a few questions about his proposal. His answers appear below, edited for clarity and brevity.
What exactly are you proposing, and why?
The Joint SubCommittee would: (1) seek input from monetary experts and constitutional scholars to explore at public meetings the impact of monetary policy on the real economy; (2) collect and examine historical data with regard to economic performance under various monetary regimes -- [a] from before the establishment of the Federal Reserve in 1913 including the pre-Fed era prior to 1913; [b] through FDR's devaluation of the dollar's official gold content; [c] continue with the 1944 Bretton Woods agreement and economic output under a gold-exchange system; [d] consider the fiscal pressures leading to the August 1971 decision by Nixon to sever the last gold link for the dollar.
The study would compare the relative stability and productive economic growth performance under these different monetary systems in order to examine whether current monetary policy, involving unprecedented intervention by the Fed in credit markets and what might be deemed an unhealthy and enabling role in financing government deficit spending, serves the best interests of America's economy and citizens. One very pronounced effect of the Fed's serial quantitative easing by has been a boost in stock market gains. This occurs at the expense of those who cannot partake in this Fed-induced liquidity fest. The dollar should work the same way for rich and poor alike.
What problem do you think a gold standard would solve and how would this help put people back to work? If there were a tradeoff, hypothetically-speaking, between lower (i.e., zero) inflation and higher unemployment today, do you think that's one worth accepting?
Most observers would agree that a gold standard has credibility from a historical perspective; it has provided a viable international monetary system in earlier times and facilitated free trade and capital flows. The point of contention that underlies opposition to a gold standard is that a gold standard essentially rejects discretionary monetary authority in favor of free-market forces to calibrate money issuance to the needs of the real economy is quite appealing.
A gold standard doesn't "solve" economic problems, per se, such as unemployment. But it does provide -- potentially -- a more organic approach to suitably matching money supply and productive economic activity. It's true, of course, that debilitating asset bubbles can develop under a gold standard. (Remember the Garden of Eden?) But the question becomes one of comparing the relative global economic effects under different monetary regimes. A gold standard would establish a monetary foundation wherein price signals were less vulnerable to distortion through manipulation of interest rates, thereby reducing the misuse of capital or mal-investment that results in poor economic performance. The best antidote to unemployment is real economic growth (versus short-lived and superficial reactions to monetary "stimulus") and a sense of confidence that businessmen or women who take capital expansion risks will not be undermined by monetary sleight-of-hand.
You presume an ostensible trade-off between lower inflation and unemployment. I just point out that perpetual inflation, even if it you think it is "low", is nevertheless damaging because of its distorting impact on the economy -- just look what happened to the housing sector, and the effect empty, foreclosed houses have on neighborhoods.
Okay, why do you think the economy started recovering in 1933 after FDR devalued the dollar against gold? And why do you think the same was true of pretty much every other country during the Great Depression?
Given the deteriorating economic and trade situation around the world in 1933/34, the decision to go off gold can be understood -- even if it imposed chilling policies on U.S. citizens, effectively confiscating privately-held gold and making it a criminal offense for Americans to own or trade gold ultimately for the next four decades.
Still, "recovery" is not exactly the word I would use to describe the U.S. economy in the latter half of the 1930s, nor was the rest of the world in healthy recovery mode. About 18 months ago I read a book by Amity Shlaes, The Forgotten Man: A New History of the Great Depression, for a compelling refutation of the premise that FDR's policies had a wholly positive effect and got us out of the Great Depression.
Ms. Shlaes suggests that government intervention during the 1930s, contrary to the prevalent interpretation, was largely ad hoc decision-making to confront a burgeoning crisis. Some of it looked like seeds President Hoover had planted. And it should not be ignored that citizens paid a heavy price in terms of personal economic freedom in the wake of FDR's far-reaching monetary and fiscal "reforms" and corresponding increase of government power.
Shlaes concludes that it was not the economic impact of New Deal professors and their policies, but rather the outbreak of World War II that brought an end to the Depression.
Do you think Americans are better off today than they were in 1913 when the Fed was created, or in 1933 when we left the old gold standard?
Do you mean extended life span? More empowered through technological advances in communications? Higher literacy rates and educational opportunities? In some areas efficiency has increased. Clearly, yes. But does that make us "better off"?
It's a far cry to suggest these results causally comport with the creation of the Fed in 1913. Today, honest businessmen are scarcely willing to make a move without first seeking to discern the Fed's intentions for the economy. Even more than the precarious fiscal situation of the federal budget and its associated political theater, monetary policy has become the elephant in the room. Or some might say, the Fed has become the central planner for an intimidated private sector.
So yes, Americans would be better off with a rules-based monetary system both in their financial and family affairs. Asset bubbles, not inflation, pose the more serious threat to economic recovery because they could lead to a new financial shock and subsequent relapse. Inflation is low, true, but the Fed keeps it artificially low by policies that inhibit normal multiplier effects from increased bank reserves. The conditions wrought today though Fed policies constitute the worst of all worlds for encouraging the "animal spirits" of entrepreneurial endeavor: Loose money, tight credit.
The demoralization of free-market capitalism might well turn out to be the most damaging unintended consequence of activist monetary policy. The Fed's facilitating self-indulgence while punishing self-sacrifice is a recipe for disaster.
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Matthew O'Brien is a former senior associate editor at The Atlantic.