A gold standard is just government price fixing
Isn’t it perplexing that people who advocate a return to the gold standard are often against big government and supposedly pro-market? After all, the term “gold standard” is just a euphemism for government price fixing where the government sets an arbitrary, non-market price for the currency/gold conversion. By now humans should have learned that government price fixing almost always leads to a host of bad, unintended consequences. I’ll get to those in a moment.
But first, let me acknowledge that I fully sympathize with the intention behind the gold standard. The intent is to impose fiscal discipline on governments. History has shown time and again that governments need that discipline. This is especially true in democracies where oftentimes the guy who promises the most free stuff gets elected. The gold standard may have flaws, argue its proponents, but it is better than the alternatives. Well, sorry, I have to disagree… I do have a better alternative, and you can read about it in the next blog post: “The Gold Equivalence Provision”.
So what are the unintended consequences? When a government enforces a non-market price on a commodity, be it gold or gasoline, then it has to enforce it. That means it has to use brute force (which consumes economic resources) to make that price stick. Franklin Roosevelt had to use police power and threats of jail time to confiscate all private gold in 1933. Do my libertarian friends want a repeat of that? I think it is much better to have a free market in gold where you can buy and sell it freely with no government intervention. If the world’s net-exporters (China and Japan) want to hoard all the world’s gold they can do that today. Nobody’s stopping them.
Another negative consequence is that a distorted gold price leads to wasteful behaviors. If the price is set too low then everyone would swap the paper currency for gold and there would be no currency (duh!). That means the price would have to be set higher than the market price. So then a portion of the labor supply gets re-assigned into mining a commodity that has little economic value. The government would quickly own the shiny-but-useless 67 foot metal cube that Warren Buffet talks about.
Worst of all, if the price of gold was fixed then investors wouldn’t be able to profit from government stupidity as easily. With a floating gold price I have the freedom to vote against government policy (and make handsome profits). In a free market, the gold price contains valuable information which provides important feedback to all economic actors. That information content is lost with an artificial, fixed price.
I totally support constraining reckless government spending. But let’s do it with mechanisms that are consistent with free markets and basic economic reality. See my next blog post.