Myths and Realities of Returning to a Gold Standard

By Terry Coxon, Casey Research

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public’s consciousness.

I’m happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I’ve noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let’s take a closer look at what it really means. It’s not that complicated.

What Isn’t at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn’t been the source of all mischief.

I’ve heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn’t.

The legal-tender laws are usually part of the story, but the story doesn’t hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don’t like it, you can avoid it by declining to accept anyone’s IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government’s claim that it owns “dollar” as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark “Chevy” and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn’t alter that situation or expand the range of your choices.

I’ve also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It’s quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn’t redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).