The True Gold Standard (Second Edition)
There are two leading phrases lingering in the culture as repudiations of the gold standard. One is Bryan's "cross of gold" speech, a subject for another essay. The second is Keynes's abjuration of gold as a "barbarous relic." Both of these all too often are used as thoughtless slurs without a clear understanding of what their authors were getting at.
Thus, it is fascinating to find this comment by the great scholar (and biographer) of Keynes, Lord Robert Skidelsky, in a recent piece in the Financial Times, reproduced here, entitled A golden opportunity for monetary reform. Lord Skidelsky:
Keynes’s famous dismissal of the gold standard as a “barbarous relic” does not quite capture his opinion of the metal, which he thought would be useful as a constitutional monarch but disastrous as a despot.
This does not mean to imply support by Lord Skidelsky of the gold standard. He rejects it as "too deflationary." A deflationary danger indeed would apply if the gold standard were misapplied, as it was by Chancellor of the Exchequer Winston Churchill in 1925. In setting the price of gold too low, privileging creditors over debtors, he precipitated the loss of millions of jobs and the general strike of 1926, leading to his "ten years in the wilderness."
There is no need to risk the replication of Churchill's greatest blunder. A sound price determination mechanism, by reference to free market pricing and the well-documented marginal cost of the extraction and refinement of gold ore for operating mines, is well understood. The Lehrman Institute's founder, Lewis E. Lehrman, has designed a mechanism building in a modest premium utterly ruling out the possibility of deflation.
Keynes was no friend to the debasement of the currency. In The Economic Consequences of the Peace, chapter VI, p. 228, he memorably states:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
It impossible to imagine that Keynes would not have been appalled by the conduct of monetary policy under the prevailing free-floating system. Lord Skidelsky has performed a great service by rescuing Keynes's rhetorical trope from its position of grotesque caricature into which it has been deformed in the mouths of lesser thinkers, restoring Keynes's far more nuanced postition:
Lord Skidelsky's observation, with appreciation, in context, with encouragement to read the whole:
Gold would remain as a reference point for the value of bancor, thus limiting the capacity of the ICB to create credit – which seems similar to Mr Zoellick's idea. Keynes's famous description of the gold standard as a "barbarous relic" does not quite capture his opinion of the metal, which he thought would be useful as a constitutional monarch but disastrous as a despot.
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Why the Gold Standard?