A New Golden Age?

A financial analyst suggests re-linking the dollar to gold


Nathan Lewis, a financial analyst and asset manager with a "supply side" background has written a new book, Gold: The Once and Future Money (Wiley). It presents a history of how different monetary standards have come and gone in the U.S. and the world, and explains how the wild, damaging fluctuations in national and international currency values that have bedeviled the 20th century are related to lack of a fixed standard of value for our paper money.

Lewis argues for a return to a solidly maintained "gold peg" for U.S. currency. But he does so in a manner that might infuriate both the mainstream believer in the post-1971 free-floating fiat paper money managed by the Federal Reserve and the hardcore libertarian goldbug who thinks money should be gold, not merely be pegged to it.

I interviewed Lewis by phone last Friday about gold standard purism, the economic record of fiat money, and what a gold standard can—and can't—do.

reason: What happened to the classical gold standard? Most laymen and even most financial professionals assume it's a proven failure, something perhaps appropriate in the past but wisely abandoned.

Nathan Lewis: The "classical gold standard" is the sort of thing that if you go looking for it, you'll never quite find it. There has been constant evolution of the exact monetary processes people and governments have used. But for a long time, what they all had in common was that they were in some way pegged to gold, whether it was actual gold coin or paper money redeemable in gold in some respect. Even in the United States when it was illegal to own gold after 1933, nevertheless until 1971 our money was pegged to gold, even if a bit loosely. It's wrong if your idea of the "classical gold standard" means we have to be wearing stovepipe hats.

Although after World War II the U.S. was pegged to gold and everyone else was pegged to the U.S., no one [here] used actual gold since 1933, so it became an imaginary thing for lots of Americans. In the early 1970s when the government thought we would have a recession, and the idea had become that when that might happen, the Federal Reserve should get busy [loosening the money supply], that came into conflict with the gold standard [and Nixon abandoned it entirely]. It seemed like an anachronism at the time. Of course the result was the biggest inflation in U.S. history. While most people didn't see the connection at the time, I think it's getting clear.

reason: In my experience, almost everyone still thinks any sort of gold standard is an outlandish idea. See, for example, how people react to Ron Paul's advocacy of it. But you are optimistic that we will return to a currency pegged in gold. Why?

Lewis: I think gold standard advocates withdrew into their own religion if you will, worshipping images of the 1928 gold coin, without really [emphasizing] the plain technical advantages that I wrote about thoroughly that make sense to laymen, like low interest rates and no inflation. I also laid out in a more realistic way how to do it—so people don't fear that the only solution is that everyone needs gold coins. I think a switch back to gold might be more likely to start outside the U.S. There's always the disaster scenario of hyperinflation and then the only thing to use is krugerrands from the shoebox, but I also see potential for a repeat of a 1970s situation, not a total collapse but lots of problems with the currency. Then somewhere like Dubai or Vietnam might start issuing gold-linked currency and it might take off.

reason: For a book advocating a gold standard, you are pretty tough on 100 percent reserve gold—money advocates of the Murray Rothbard school….

Lewis: I was a little too harsh on Ron Paul. I've looked back on his comments in the 1980s and I would agree with practically all of it today. But I think Rothbard and the Austrian group really dropped the ball. The Austrians got into this idea that banks are evil and fractional reserve banking is a crime.

One-to-one backing of notes for gold has existed, but I think the last large scale attempt was in the 16th century. If you really want a bank account that's nothing but a warehouse for gold, you can get one from Switzerland. If you believe in the free market, you can now pick up the phone and buy gold.

But most people don't want to do that, and for the most part [fractional reserve banking] works. Bank disasters are extremely rare, and when they do happen it's because of monetary policy mix ups. I want to hit people with the idea that we were essentially on a gold standard [with the dollar pegged to gold internationally] as recently as the Kennedy administration. We were on gold when man walked on the moon. If people think we have to go back 500 years [for a workable gold standard], it's not gonna happen.

reason: Lots of people seem to think that what you say about fractional reserve banking—it works pretty well—is true of the entire fiat money system we've had since 1971, so why do a radical change back toward gold in any manner?

Lewis: It hasn't been all that great. The Greenspan years look pretty good and one reason was Greenspan's a gold guy, though not like Ron Paul. You look—Greenspan started with the dollar around $435 per gold oz. and ended it at about the same place. Maybe the reason the Greenspan years were good is that he was kind of vaguely on a gold standard. But except for his years, [the record of fiat money] doesn't look so good—like now, we definitely have inflationary problems. The Volcker period had wild rides. And the 1970s were a total [mess], though we are in denial about it today.

In the bigger picture, one thing that happened in the period the U.S. was on a gold standard from 1789-1971 was that America's middle class got wealthy, went from being dirt farmers to being the most prosperous middle class the world has ever seen. Since [1971, when Nixon completely disengaged the dollar from gold] basically we've been going sideways at best. If you measure in inflation-adjusted terms, for the last 40 years we've been going nowhere; to the [extent there's been progress] it's been because households have had two earners instead of one.

reason: We're in the midst of something of an economic crisis right now, blamed by most on mortgage industry problems. Would your gold-peg prescriptions have helped?

Lewis: I think you shouldn't expect too much of a gold standard. A stabilized money can prevent inflation and deflation, but it doesn't prevent lending money on stupid things, and it doesn't prevent people buying houses three times what they can afford. If you look at the history of capitalism, you see booms and busts and episodes of ridiculousness, South Sea bubbles and tulip manias, that all took place under one gold standard or another. The gold standard doesn't prevent every economic insanity; it just prevents the problems that arise from unstable money.

reason: You write that the 20th century gold standard post-war was "a rather crude and messy one, and it had only one tie to gold: the willingness of the U.S. government to keep the dollar pegged to gold." Won't that be true with your policy prescription of the Fed holding the dollar's value within a certain range of gold prices, rather than a true 100 percent dollar equality with a given weight of gold?

Lewis: A lot of the pure gold standard ideas are motivated by a desire to create a monetary system that's government-proof. True, if we all did business in gold coins then they can't lose value. But what happens when the government says gold coins are illegal, like it did in 1933? As long as we have government that sort of thing will be an issue. In the days when banks issued gold-redeemable notes, sometimes they became unredeemable and the government went along with that.

These ideas about government-proof monetary system are noble, but I can't see any system that would work without unseen problems that would cause government to get rid of it. You already have redeemability—you can always trade paper with gold with somebody. But there will never be enough gold to cover all the paper; there's more paper than gold, [so one effect of 100 percent gold money could be] to make the economy much smaller.

reason: Why wouldn't prices, in a world where there was less paper money because it was all 100 percent linked with a given amount of gold, just adjust downward in a deflationary process, reversing the inflationary process we're seen in the last century where the dollar has lost most of its value?

Lewis: All sorts of problems emerge when money changes value, whether it be through inflation or deflation. It's a bad idea to think everything will be great as long as money changes value by some radical degree [in either direction]. That misses the point [of money] if you ask me. [The advantage of] gold is creating money of stable value, so if a [gold standard] creates vast instability of value…what happens effectively to those who tried to pull that kind of shenanigans [such as imposing a straight gold standard that could lead to vast deflation] is they'd get pulled out of office or the currency would be abandoned.

reason: What makes you think your gold peg idea would be long-lasting even if established?

Lewis: Well, Britain, the great champion of the gold standard, went off its gold standard in 1797, and there was nothing anyone could do except going through the process of political action to try to prevent it or reverse it. We have always had government and it looks like we'll continue to have to live with it. In the 1850s there were thousands of banks with banknotes flying around, and today if the top 10 commercial banks started issuing bank notes and you could use a Bank of America [dollar] instead of a Federal Reserve note….well, when push came to shove if the government said, you're not allowed to do that, it would stop overnight. I think it could be feasible, though. But in my book I didn't want to say, here are ten possible systems [based in gold]. I wanted to present something specific a minister of finance or a journalist could understand and say, here's a specific solution that makes sense, similar to what we had in the 1960s except now private citizens can own gold coins.

Brian Doherty is a senior editor for reason.

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  1. We need to end FDR’s prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

  2. We need to end FDR’s prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

    You’re kidding, right? You know that you can old gold now (actually, since 1975).

  3. “own” not “old”

  4. Marcvs — Thanks for correcting an incredible blind spot in my knowledge of the law.

    *Blushes, kicks stone, shuffles off *

  5. I remember in business school talking to some idiots who scoffed at the idea of a gold standard (they were idiots for other reasons than questioning the GS). This was in 1997, when the SE Asia currency meltdown was in full force. I pointed out that these countries could have stopped losing billions of dollars by having gold standards, and they just huffed and puffed without addressing the issue.

  6. The more I learn about financial policy, the more I like Ron Paul.

  7. prolefeed,

    Im fine with letting people have a choice as soon as the government gets out of the fiat money business. Then, people can choose between independent gold money and independent fiat money.

  8. We need to end FDR’s prohibition on owning gold. If people want to use the fiat money instead of that, fine, but let people have the choice.

    Not only is it legal to own but the US mint sells it.

  9. Pegging the dollar to a composite of metals would keep it even more stable. A single metal’s value can change a lot, like aluminum’s value did.

  10. Reason has yet to link to it but watch a grumpy looking Brian talk with Will Wilkinson about his book over here: Here

  11. Why not have an Iron standard or copper?

    Gold is stupid and if you pegged it to the dollar you would simply price it even higher then its utility value.

    What the fed really should do is to stop printing and loaning new money (as opposed to replacement) and peg the money supply to a fixed number…this is in essence what the gold freaks want anyway…to peg it to a finite number in the hopes of staving off inflation.

  12. Pegging the dollar to a composite of metals would keep it even more stable.

    Not much sense in stopping there – why not include a variety of commodities, not just metals?

  13. What a horrible article. Greenspan years were good for inflation? He was on a defacto gold standard? Booms and busts arent materially different under a gold standard? This is either a put up job or a case of serious economic ignorance, like the above comment about the iron and copper standard.

  14. “What the fed really should do is to stop printing and loaning new money (as opposed to replacement) and peg the money supply to a fixed number…this is in essence what the gold freaks want anyway…to peg it to a finite number in the hopes of staving off inflation.”

    Pegging to a fixed number doesn’t work because the economy grows so you need more money. Money is a representation for stuff and if you have more stuff you need more money. So the money supply must grow. If the money supply does not grow then you will get deflation.

    The point is not to peg money supply to a fixed number but rather to peg the value of a unit of currency to a fixed value. One dollar today should buy at least as much 50 years from now as it does today.

  15. Why is no one saying anything about using a variable supply of money (IE interest rates) to control speculation and prevent depressions?

    “[A] If the money supply does not grow then you will get deflation… [B] One dollar today should buy at least as much 50 years from now as it does today.”

    First, doesn’t (a) contradict (b)? Isn’t (b) deflation?

    Second, why (b)? One dollar today buys a lot less than it bought 50 years ago; and then it bought less than it had bought 50 years earlier. So what?

  16. wyote –

    It doesn’t represent deflation, because deflation occurs when a single unit of currency is valued in terms of more “stuff.” If you keep the value at a flat rate, then the money supply stays at the rate of growth, supply of money meets its actual demand.

    When there’s more money than a demand for it, you experience inflation, and when there’s not enough money you experience deflation. Inflation is more tolerable than deflation, but it’s not the ideal people present it as, because it discourages savings and inordinately impacts the poor. In inflationary cycles, the poorer you are, the greater the value of your labor comes through immediate consumption. That’s what Lewis is talking about with moving sideways, because while middle income families can still save and invest somewhat, the poor have fewer opportunities to move up the economic ladder, since it makes more sense for them in the short term to consume.

    Blacks were moving up the social and economic ladders throughout the 50’s and 60’s, since they were saving money in order to educate themselves or their children. Then hyperinflation hit, and black communities have been stuck in limbo ever since.

  17. Were Blacks and other poor people really investing much in the 50s and 60s? Wouldn’t urban decay (loss of manufacturing jobs, etc.) have more to do with it?

    Also, deflation is measured in prices, right? Then more things for the same dollar = less dollar for the same things = deflation?

    I’m not an economist, but I have never heard anyone talk about inflation as a good thing, but as a necessary evil.

  18. Where Austrians dropped the ball is in not recognizing (or not hammering the idea) that fractional reserve banking was an unintended consequence of usury laws that have no connection to supply and demand.

  19. This is either a put up job or a case of serious economic ignorance, like the above comment about the iron and copper standard.

    I am not stupid you are stupid! =P

    Anyway kidding aside why don’t you enlighten our “ignorance”.

  20. Pegging to a fixed number doesn’t work because the economy grows so you need more money. Money is a representation for stuff and if you have more stuff you need more money. So the money supply must grow. If the money supply does not grow then you will get deflation.

    You mean the value of money inflates over time? How again is this a problem?

  21. Well, if you’re trying to back your currency with gold you’re going to have problems anyhow because of needing to get sufficient real stuff. GNP increases, supply of gold has to increase as well. If you can’t find sufficient, you’re going to need to change the peg between dollar and gold.

    Frankly, considering the shenanigans I’ve seen in gold prices over the last several years, I think a gold peg is ridiculously naive.

  22. I don’t think that a gold standard will work in the modern world.

    Although, a gold standard might protect from internal political inflation and deflation, it can’t protect from inflation and deflation caused by changes in supply of gold itself. Prior to the 20th century, gold rushes could set off periods of inflation by injecting significant amounts of gold into the world monetary system. Conversely, rapidly growing economies could suffer deflation when economic growth out paced gold production.

    In our world of rapidly evolving technology we also run the risk that a new technology will make use of gold and that lots of gold will be removed from circulation creating a deflation.

    I think economic national security also plays a role. The U.S. abandoned the gold standard in the early 70’s in part because the Soviet Union produced 3/4 of world’s new gold. It’s easy to see how a country with a well disciplined fiat currency could wage economic warfare on a gold standard country by manipulating the gold markets with hoarding and/or flooding. Today, a gold standard would place the world economy at the mercy of the Russian Federation and South Africa. Neither particularly stable places.

    I think the Greenspan system of keeping an informal linkage between gold and the fiat currency works best. I don’t think we have any short cuts to political discipline.

  23. Under Greenspan the dollar lost 50% of its value.

    If that’s an example of a gold mimic standard, god save us all from outright inflation.

  24. A gold standard is no different than fiat currency. It is a completely arbitrary value. A thing is worth only that which another is willing to give for it.

    Picking a fixed number and saying “a dollar is worth this fraction of an ounce of gold” is completely boffo. It’s a complete denial of capitalism. And it assumes that gold has intrinsic value, which it does not. And how the heck is this supposed to stop inflation? And why does it matter? Unless you can convince people that they should earn the same salary forever, inflation is pretty much guaranteed.

    Anyone who has been paying attention could tell you quite well that it was the emergence of the welfare state and the destruction of the nuclear family that undermined the growth of the black middle class in America. Government fiscal policy had nothing to do with it.

  25. One of the impacts of going to a gold standard is that the value of the currency does not adjust for labor productivity growth. In other words, if we have productivity growth of 3% per year, then under a gold standard, prices will drop 3% on average each year. That’s because gold’s value stays fixed. Productivity growth makes it possible to produce goods and services for fewer labor hours, less expensive parts, etc. and so price drop.

    With a fiat currency, the Fed takes advantage of its fiat nature to devalue its value by expanding its base as much or more than labor productivity growth. It then can keep the CPI at or above zero, not go negative by 3%.

    Now, admittedly, gold’s value can fluctuate if big new finds of gold are discovered, but surprisingly, when it’s used as a currency, feedback loops stabilize it. Also, those big gold finds actually play out over several years, and their impact is actually relatively low.

  26. Wouldn’t returning to the gold standard make us vulnerable to the plots of Darwin & Minerva Mayflower?

  27. The old gold standard worked because gold was scarce and universally recognized as valuable. In modern times, that won’t work, because gold’s intrinsic value is mostly in technical pursuits. The value is a myth based on its rarity, and that doesn’t work in the 21st century.

    If we had a truly rare and unreproducible commodity, we could make a new money standard based on it. But gold ain’t it.

  28. Helium might be it.

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