The True Gold Standard (Second Edition)
Discovering the truth behind what a gold dollar standard is and isn't.
Let’s dispel some confusion as to how the gold standard works in practice. Some still believe that it involves carrying around purses full of gold coins. That’s a funny misconception.
When my father, born in 1910, was a young man the circulating currency said “gold certificate.” He could walk into any bank with a $20 bill, tender that, and walk out with a $20 gold coin weighing just about an ounce. That’s a gold dollar. It was very rare that people would prefer a gold dollar to a gold certificate. A gold dollar was heavy and inconvenient. That said, your right to demand a gold dollar for your money kept the money honest, as good as gold.
There was a saying back then, “an honest day’s pay for an honest day’s work.” And it was nicely reinforced by honest money: the gold dollar.
When I, born in 1952, was a young man the dollar bill said “silver certificate.” On occasions such as birthdays I might be given a handful of silver dollars rather than dollar bills. A silver dollar was just more impressive than a paper one. Circulating change such as dimes and quarters also were made of silver. There was something hefty and impressive about silver dollars, some of which, the Peace Dollar, had an Art Deco Lady Liberty, some, older ones – having remained in circulation since the late 19th century—had a more matronly figure of Liberty.
The dollar then – exchangeable into a silver dollar—had a lot of buying power. Penny candy cost…a penny. A comic book cost a dime or twelve cents. Now comics cost $3! While it didn’t have the value of a gold dollar of my father’s era you could feel the heft and dignity of it. Like my father before me I didn’t cart around coins to make purchases. But if I wished to I could. People’s ability to exchange currency for silver helped to keep the money honest.
My own children have to make do with “Federal Reserve Notes.” Savant James Grant wittily has dubbed this, “faith-based money,” backed, as it is, only by “the full faith and credit of the United States.” There’s another way to think about it. My children can take a dollar bill into any bank and receive, in return, four quarters. These quarters are made mostly from copper alloyed with nickel, base metals.
So a progression, or more aptly, a regression can be noted: from the gold dollar, to the silver dollar, to the base metal dollar. Metaphorically it is almost a kind of reverse alchemy. This represents a debasement of the standard. The value of the dollar has eroded by some 95% from the day my father was born until today. For the most part it has been a slow process of erosion rather than a dramatic event. That said, history records that the gold dollar held its value – over centuries—and under the gold dollar. History records that with the gold dollar the economy grew, on balance, more steadily and robustly than it has since the last remnants of the gold standard were repudiated on August 15, 1971.
The gold standard, the gold dollar, were not perfect. No human institution can be perfect. And yet, the evidence is abundant that the economy and society under the gold dollar, honest money, thrived in ways that those who have lived only under the “Base Metal Standard” hardly may imagine. There are good reasons to believe that the gold dollar is the least imperfect of all monetary standards that have been tried.
Oct 20, 2014
Lawrence H. White is an economics professor at George Mason University who teaches graduate level monetary theory and policy. Lawrence White As described by the Wikipedia, "White earned his BA at Harvard University (1977) and PhD at the University of California at Los Angeles (1982). Before his current role at George Mason...
The Federal Reserve System's James Narron and David Skeie, career officials with the Federal Reserve System, are two eminent historically erudite figures. Writing in the New York Federal Reserve Bank's online publication, Liberty Street Economics, they recently provided a continuation of their valuable historical "revue," Crisis Chronicles: The Collapse of the...
Jul 23, 2014
An article headline in Saturday’s Wall Street Journalread “Rate Talk Heats Up Within The Fed.” As Journalreporters Jon Hilsenrath and Michael Derby...
Dec 19, 2012
Key Monetary Writings
The Federal Reserve System is a major sponsor of monetary economics research by American economists. I provide some measures...
Why the Gold Standard?