Libertarians And The Temptation Of The Gold Standard

Posted on May 25, 2010


The people who are part of the Tea Party come from many perspectives on the political spectrum and are not all lock step in their ideas of what needs to be done about our national economic dilemma,  however an inordinate number of individuals in the Tea Party seem to be of a Libertarian bent and supporters of  The Austrian School of Economics. This group of economists believe that the World’s economies need to return to a rigid Gold Standard. I agree that currency not backed by Gold or some other commodity of fixed value is responsible for allowing governments to overspend and run up huge deficits.   I also  believe it was a huge mistake to ever leave the Gold Standard. I  am, however, skeptical about the ability to return to a fixed Gold Standard in today’s world without causing much more economic agony and grief than we already have.  In examining a return to the Gold Standard we have an example from history of just such an attempt.  England attempted a return to the Gold Standard in 1925 after having abandoned it during WWI.  The attempt was a dismal failure and is said to have been one of the factors in prolonging the Depression of the 1930’s.  The U.S. desperately needs to cut the size and cost of government.  The deficits we are currently running are unsustainable and will be ultimately ruinous.  I am,however, not sure that a return to the Gold Standard is the best way to achieve this.  Congressman and former Presidential Primary candidate  Ron Paul, a hero to Libertarians and an advocate of Austrian Economics, has backed away  from the belief that a strict Gold Standard is the only way to solve the problem.  Note this entry from Wikipedia:

(The return to the gold standard is supported by many followers of the Austrian School of Economics, Objectivists and libertarians [5] largely because they object to the role of the government in issuing fiat currency through central banks. A significant number of gold standard advocates also call for a mandated end to fractional reserve banking.[citation needed]

U.S. Congressman Ron Paul has continually argued for the reinstatement of the gold standard, but is no longer a strict advocate, instead supporting a basket of commodities that is voted upon by the free markets.)

I think that  Congressman Paul  has seen that most voters don’t seem to be ready for any such reform as a Gold Standard and that the entire present mind-set and ideology of interest groups, politicians and voters would have to be changed.   The following disadvantages of a return to a Gold standard are noted here from the same Wikipedia entry:


Gold prices (US$ per ounce) since 1968, in nominal US$ and inflation adjusted US$.

  • A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply. When an economy grows faster than its money supply, the same money is used to execute a larger number of transactions. The only ways an economy can execute more transactions with the same amount of money are to execute transactions more quickly, and to lower the cost of the transactions. As deflation drives costs down, the value of each unit of money goes up. This increases the value of cash, but it decreases the value of assets, since the same asset can be purchased with less money. This in turn increases the ratio of debts to assets over time. For example, the monthly cost of a fixed-rate home mortgage stays the same, but the value of the house goes down, and the value of the dollars required to pay the mortgage goes up. In essence, deflation rewards cash savings, and discourages the use of loans.
  • The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.[17] Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2).[18] Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.[19] For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary[20] whilst others who are not opposed to fractional reserve banking argue that only base currency and not deposits would need to be replaced.[citation needed] The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.[21]
  • Many economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.[22] Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.[23] Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn’t expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s. Fed operatives simply failed to utilize them. In this case, a causal factor of the Great Depression was not the gold standard but rather a politically usurped monetary system.[24]
  • Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.[25][26] Some hold the view that this contributed to the severity and length of the Great Depression.[19][27]
  • Some have contended that the gold standard may be susceptible to speculative attacks when a government’s financial position appears weak. For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency.[27]
  • If a country wanted to devalue its currency it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.[28]

Perhaps a better solution to our fiscal problems would be a Constitutional Amendment requiring a balanced budget.  If a Constitutional Amendment were to be enacted mandating a balanced Federal Budget many reforms would be required.  The Federal Reserve would have to stop inflating the money supply which would mean an end to bail outs of the financial markets. Federal entitlements  programs would need to be severely cut back or in some cases ended. Departments of the government would need to be greatly reduced or phased out . Perhaps even a moratorium on increases of all but emergency government spending . There would be a major push for increased taxation, but even draconian levels of tax increase would not eliminate the deficit.  The only thing that will bring the deficit down to budget balancing levels are 1.  A reduction in the size and cost of government.   2. Robust growth of GDP (growing our way out of deficit) and this is choked off by increased taxation.  The Constitutional Amendment route to fixing the economy will be difficult, but in my opinion will not be as complicated, difficult or painful as trying to return to the Gold Standard.  I will end this by returning to England’s attempt to return to  the Gold Standard in 1925.  Bettina Bien Greaves  is a student of Ludwig Von Mises’s work. Von Mises is one of the best known of the Austrian Economists. In studying the results of the British attempt to return to Gold she concludes:

Faced with a devalued pound that was worth less on the market than it had been, the British again chose, as they had after the Napoleonic wars, to try to return to gold at the pre-war, pre-inflation rate. On April 28, 1925, England went back on the gold standard at the artificially high rate for the pound of US$4.86. The immediate effect was to price British goods out of the world market. For instance, U.S. importers who had been paying US$4.40 to buy a British pound’s worth of British wool or coal, now had to pay about 10 percent more. England was heavily dependent on exports, especially of coal, to pay for imported food and raw materials for her factories. As the cost of her goods to foreign buyers went up, they could buy less and British exports declined. Her factories and mines were hard hit. To keep the factories and mines open and men working, money wages would have had to be adjusted downward. This drop in money wages would not necessarily have affected real wages for, with the return to gold, the pound was worth more. But the unionized workers resisted and refused to work for less. Many went on the dole. And many went out on strike. Prices and production were seriously disrupted. Finally, on September 20, 1931, England announced that she would again suspend gold payments and go off the gold standard. The consequences were disastrous. The British monetary experiment played an important role in bringing about and prolonging the world depression of the 1930s.

With this historical assessment from Ms. Greaves, I will leave it to my readers to decide for themselves whether the current Libertarian idea of a return to a Gold Standard is the best answer to the problem.