The Gold Standard Won’t Be Coming Back

George Selgin joins us for a discussion about the gold standard. How did America get off the gold standard, and is there any chance of the country returning to it?

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George Selgin joins us for a discussion about the gold standard. How did America get off the gold standard, and is there any chance of the country returning to it? Would it be a good idea to revive the standard?

Why gold in particular and not any other commodity? Is gold less valuable as money than in other applications, like electronics manufacturing?

Show Notes and Further Reading

Trevor asks whether people in Venezuela have started switching to Bitcoin, since Venezuela’s own currency is falling apart. According to this article from Jim Epstein in next month’s issue of Reason, that’s exactly what they’re doing.


Trevor Burrus: Welcome to Free Thoughts from and the Cato Institute. I’m Trevor Burrus.

Aaron Ross Powell: And I’m Aaron Powell.

Trevor Burrus: Joining us today is George A. Selgin, director of the Cato Institute’s Center for Monetary and Financial Alternatives. Welcome back to Free Thoughts, George.

George Selgin: Thanks, Trevor.

Trevor Burrus: So, today, we’re going to be discussing, at least in part, the gold standard which is something that is actually associated with libertarians quite a bit—gold bugs, a lot of kind of discussion of things like this. Before we get into some of those kind of issues about libertarians and the gold standard, what is the gold standard when people just say, “We need a gold standard.” What do they mean?

George Selgin: Well, I can’t tell you what other people mean because that depends. But at its most basic, a gold standard is a monetary system where the basic money unit is a definite quantity of gold. So, it could be an ounce or two or three or any other weight of gold of a certain purity. And, of course, a gold standard system would have actual coins representing those—that basic quantity or multiples or fractions thereof. That’s the most basic gold standard. But, of course, we have to think about paper money and how that fits in there traditionally. Paper money fits into a gold standard by consisting only of good claims or IOUs to gold where the IOUs are promises to pay definite quantities of gold, which are again based on whatever those standard units are and their coin representatives. So, that’s at its most basic.

Trevor Burrus: And this is a big distinction between coins which used to—a lot of people don’t even realize more about—they actually had like gold or silver or bronze in them and they were actually viable, correct? As opposed to—

George Selgin: Yes, of course. They were valuable because gold is a valuable commodity and its value might be enhanced by the fact that it’s also the monetary middle. But its value doesn’t depend on that fact. It exists independently. But it’s always important to recognize it as soon as you have paper money in a gold standard. You’ve got more than one condition for the gold standard being in effect. You have the condition for what coins consist of or the most basic ones, and then of course you have the requirements for paper money itself.

I wanted to add one more dimension to this because not to complicate it too much but the nature of the paper gold standard—let’s call it that—has changed a lot in history. And the most fundamental change has to do with the extent to which governments are involved in administering paper money. As I said in the very old—earliest stages, paper money that was consistent with the gold standard consisted of real IOUs to gold that were enforceable IOUs because they were based on enforceable private contracts. Basically, if a bank issued paper notes, for example, and it dishonored them by not giving people the gold that they promised to pay, then that bank was in default and that was that.

But, as central banks or government-sponsored banks more generally and governments themselves became involved in issuing paper money, when that happened, the nature of these paper representatives to gold changed even before they obviously—it obviously changed by the government’s reneging on their commitments. It changed in a more subtle way before that because sovereign immunity attached to governments and to the central banks that they sponsored or eventually it did attach to the latter. And as that happened, it was no longer the case that central bank that dishonored its promises to pay gold would necessarily suffer any consequences. It became more like the government itself in that regard.

And as soon as that happened, the nature of the gold standard itself changed because it ceased to be all that reliable at least so far as its paper representatives were concerned and that was, of course, the slippery slope to fee out money which is what you end up with when these central banks take advantage of their sovereign immunity to say, “Well, we’re just not going to pay you anymore.”

Aaron Ross Powell: Why gold? I mean when we talk about a gold standard either in the past or, you know, the arguments that we should return to one today, are we talking literally about gold? Should we be talking about gold? Does it really matter if it’s gold or any other commodity?

George Selgin: That depends, of course, on who you ask. It’s true that there’s a—the gold standard is of commodity standard, the one that’s most well-known and most popular particularly among libertarians as Trevor was saying. But a lot of this is just historical accident. It should be observed that although the gold standard has ancient roots, so does the silver standard. Silver is the most clear obvious competitor to gold and among commodity moneys. Both of those metals have obvious advantages over other commodities in not being so perishable and so on.

But, in US history, for example, the gold standard as such was not officially adopted until 1900. Up to that time, we were officially if not in practice on a bimetallic standard where the dollar or the basic monetary unit of the United States was defined both as a definite quantity of gold and as a definite quantity of silver. That’s what bimetallism means. Now, in practice, what happened under that arrangement both in the United States and in other countries—in many other countries that had it was that depending on which of the two precious metals was more valuable in the open marketplace and how their relative values compared to their implied official values given the two units that define the same dollar, the two amounts of metal that define the same dollar, you would have a tendency for one or the other metal to be driven out of circulation—to disappear from circulation and for only the—for the remaining metal to be their true standard in effect at that time.

And so, for quite a while in US history, we were actually on a de facto if not a de jure silver standard. Then, partly as a result of gold discoveries, mainly as a result of gold discoveries that made it the relatively undervalued—legally undervalued—sorry—overvalued metal, gold became the de facto standard, though still not the only official standard money. And as I said, it was only in 1900 that gold was officially enshrined as the sole standard metal. And, finally, we should remember that there were important long periods including from the Civil War until 1879 when we were neither on a gold nor a silver standard but on a temporary paper standard, the greenbacks in this case.

Trevor Burrus: What sort of problem for those who talk about the gold standard incessantly—I’m sure there’s a lot of people, you and I were talking about this before we recorded that there were just people who talk about the gold standard a lot and they’re kind of quirky about how they talk about it. They can take any conversation and direct it back to the gold standard as the solution to everything on the planet. So for those people, I want to talk a little bit more about those, but—

George Selgin: I call them “find another bar stool.”

Trevor Burrus: Exactly. Oh, I’m sure you get berated particularly, but what sort of problem is it supposed to solve? It seems like you just talk about problems that were created by the gold standard especially when you found new caches of gold. That seems to be a problem.

George Selgin: Well, let’s be careful now. What I said was that under bimetallism, discoveries of precious metals of one or the other kind could disrupt the standard and cause you to switch from effectively being on one standard to being on another. But I would call that a problem of bimetallism, not of having a metallic standard per se. As for the benefits of having a gold standard, to a considerable extent, they are the same as those of having a silver standard or any other stable single commodity standard, though some are better than others in this respect. And that big advantage consisted the fact that commodities, all of them are naturally scarce, most obviously those that are not reproducible like gold. So a standard based on such a commodity obviously doesn’t allow limitless money creation or inflation, puts a constraint on it.

But, in fact, the advantage is better than that to take the case of the gold standard and a bimetallism for that matter. We can see from the historical record that it had a tendency to—a very good tendency to preserve long run price level stability. For example, if you go back to the very earliest price level data that we have for the United States and allowing that, you know—those numbers, those figures are not all that reliable, still they suggest that back at the early days of the republic—we’re talking about the 1790s—the price level was approximately what it was still in 1913.

Now, changed—it bounced around a lot between those two dates, again, according to the statistics we had. But the long-run tendency for it to come back to wherever it started is very clear in the data.

Trevor Burrus: So you’re saying essentially, no—but with [0:10:50][Indiscernible] essentially no inflation between—

George Selgin: No long-run inflation.

Trevor Burrus: —between 1790 and 1913.

George Selgin: That’s right. And that’s not a coincidence. It’s a feature of a commodity standard like a gold standard and it’s not hard to explain. Essentially, here’s what happens. Suppose—remember that in a gold standard, the price of a unit of gold is the one thing that doesn’t change, right? So you define a dollar as so many ounces of gold. Obviously, the price of that many ounces of gold stays $1. So what does it mean to talk about inflation in a case like that? It means that other prices are rising relative to the price of gold. Well, what does that mean? It means that the cost of implements and materials and labor for producing gold, those costs are going up, but the price of gold isn’t going up, which means the profitability of mining gold is going down.

And that means that inflation tends to be self-limiting because the more it progresses, the less profitable it is to mine or search for gold and so gold output eventually slows down. Mines can even be closed because they cease to be profitable. And that puts a break on the money supply and eventually the price level will stop growing and will even come back down.

On the other hand, if you have a period of deflation, that makes gold mining and prospecting more worthwhile and the tendency is for such efforts to result in a greater output of gold that reverses the downward movement in prices, and this is exactly what happened historically. You had discoveries of gold like the discovery in California, which is a famous one that are not really accidental when you look at the big picture. What happens in most cases is prices have been falling. People will start prospecting harder for gold and eventually they find—sometimes they find a lot of it.

But instead of causing inflation, the main effect of these discoveries more often than not, not always, is to reverse what had been a deflationary trend and so helped prices come back where they were before. So this long-run stability of the price level is, in fact, a built-in feature of many commodity standards and that long-run stability will hold as long as the basic cost of production of gold at the—it has to be rising at the margin, but on the long-run, the cost of producing gold just has to not fall any faster than that of most other goods.

Aaron Ross Powell: Does picking the commodity matter in the sense that—so gold has other uses, you know, so we use it on electronics and it can be very good in certain things and—So does it—do we run the risk of if we have a gold standard of directing what might be a valuable resource to a less efficient use because people want to use it for as money and it’s less valuable than to use it in these ways that could be, you know, better in the future or more wealth-creating?

George Selgin: Well, if you want to have the advantage I just described of a commodity standard, it’s difficult to have except by having a commodity and the commodity is by definition something that’s got a value other than its value as money. So, any commodity standard is going to involve opportunity costs from employing the commodity as money rather than in any other ways. Those costs can be kept at a minimum, however, by taking careful advantage of substitutes including paper substitutes of the sort I referred to before. And if you have a well-conceived and regulated system of paper substitutes and also bank deposit substitutes that don’t have to be actual paper, that system can allow you to have a commodity standard, a gold standard, for example, where the actual amount of gold employed to maintain the standard is very low.

Just to give you an extreme case, in the Scottish banking system that you fellows know I’m very fund of because it was a very free banking system, the banks got by at one point with the reserve ratios, that is, precious metal reserves of something like 1% to 2% of their total assets. Most of the money that was actually used in Scotland consisted of the redeemable notes of a Scottish banks and also deposits held at those same banks. And for most of Scotland’s history in the late 19th and—18th and early 19th century, the system decides being cheap was also remarkably stable.

Adam Smith writes eloquently about its properties in both respects in Book 2 Chapter 2 of the Wealthy Nations. And what he points out is precisely the point that by saving on actual gold, it allowed, first, that gold to be put to other uses and, second, people savings to be harnessed for more productive uses by being backed by productive bank loans.

Trevor Burrus: So, in this situation, just to make sure I understand, the pound notes or whatever they were issuing were worth a very little amount of gold.

George Selgin: No, no.

Trevor Burrus: You say—are you—

George Selgin: They weren’t worth a little gold.

Trevor Burrus: But they were redeemable for a very little amount of gold.

George Selgin: They were—not even that. They were backed—let’s take that 1% number, right? So you might have a 5 pound Scottish—a Royal Bank of Scotland note. What I’m saying is that if you went to the Royal Bank of Scotland, its total gold reserves might be 1% to 2% with a value of its total outstanding liabilities including all its notes.

Trevor Burrus: Ah, so—

George Selgin: But that didn’t mean that the note that you were holding was worth anything less than 5 pounds or that the bank would give you anything less than 5 pounds worth of gold if you sought to redeem that note. In fact, the bank notes did circulate at their full face value just about all the time and the banks did redeem them and those things go hand-in-hand. If a bank didn’t redeem, the notes would no longer commend their face value. So, in other words, the banks found ways to manage their affairs such that they were able to get by with slim reserves. But, of course, to get there, they had to show their capacity to honor their promises regularly and it took a long time for them to establish their reliability. But they did so to the point where your average Scottish man, the last thing he wanted was to have to hold the gold guinea, thought it was a nuisance and would rush to his bank and get a good Scottish banknote to take its place. That’s how it was.

Trevor Burrus: But, they couldn’t survive, that means that if there was a run to go with your gold, they would run out.

George Selgin: Well, they might have to do some quick thinking.

Aaron Ross Powell: Some quick moving around that, but it’s kind of weird.

George Selgin: But runs were almost unknown, almost completely unknown. Runs happen in decadent banking systems like ours today and in the past. They are symptom of a banking system that has not developed in a healthy fashion.

Trevor Burrus: And that’s—that gets us into sort of the next question, which both is going back to the quirky gold standard person, which is something—Aaron and I, we as I mentioned—we don’t know a lot about monetary policy compared to other things that we know about. But it’s always very interesting to me, but one—and I can honestly say if someone comes up to me and the first thing they start talking about is the gold standard—it’s actually happened literally last night at the Cato reception. A guy came up and said, “Are you a fan of sound money?” And I pretty much assumed that the guy is going to be really quirky kind of conspiracy theories in other way, and sure enough he immediately got into the Rothschild, Illuminati and all these things. And also, you know, any—if you’re talking about—

George Selgin: Your podcast listeners cannot see me cringe here.

Trevor Burrus: Yeah. And if you’re talking about—

Aaron Ross Powell: With his hands over his face.

Trevor Burrus: If you’re having a conversation about, I don’t know, police brutality, they’ll be like, “Well, we can’t do anything unless we restore sound money.” And they get—so, here’s the question. Why do you think these people are so focused on gold? What is it about gold and just sound money in general that makes them latch on to it?

George Selgin: There are several things going on here and I feel there’s a risk, of course, of lumping all people who are fund of gold standard together with—

Trevor Burrus: Of course.

George Selgin: —the nutcases and I certainly don’t want to do that. Some of my best friends are fund of the gold standard including some very good economists I know. However, it must be said that the big part of this specific appeal of gold as opposed to other commodity standards certainly has to do with the fact that it was the last commodity standard in place here in the United States. And there’s a sense that that’s the most obvious choice to go back to if we could ever have a commodity standard again.

There’s also a lingering feeling I think among some that after all people got swindled when they suspended gold payments back in the ‘30s and ultimately abrogated all of the government’s commitments based on gold bonds and other things. And it’s confiscated private gold holdings to boot. That all of this was quite a nasty thing and that we need in some way to make up for it.

The problem with that, of course, is that every year that goes by, it becomes a less compelling point of view. It’s already been, you know, some—almost 90 years, you know, or 80+ years since this happened. And, you know, it gets to the point where it’s almost akin to suggesting that we really ought to give all the property back to Native Americans which as you know there’s certainly an argument from justice that they deserve it. On the other hand—

Trevor Burrus: But it’d be a little—It’d be a little disruptive.

George Selgin: It would be a little bit disruptive and, let’s face it, the Native Americans of today, the connections that they can show to any existing property perhaps not all that obvious. In the case of gold, though, it’s even more clear that justice wouldn’t be served by trying to restore the old gold standard because among other things, it would require a massive deflation to get there and that itself would be an awfully painful procedure. You could try to restore a new gold standard, of course, where the dollar represents a much—each dollar represents a much smaller part of gold, but what would that have to do with restoring justice or making up for anything that happened in the past?

The argument for doing anything like that for any renewal of the gold standard in my opinion has to be based on its advantages starting today and not on any claim that it would redress past injustices. So, as soon as you put it that way, then you also I think are compelled to say that we might also have to consider—we should consider all other alternatives for reforming the present system instead of treating gold as being in any way sacrosanct. Bygones are bygones. If gold is a good choice today and if there’s a good way to implement it now, well, by gosh, let’s fight for it. But if there are other better alternatives we can think of today, the fact that gold was once our standard monetary metal is itself no reason to argue for restoring it to that role.

Aaron Ross Powell: Are there any countries today that are still on a gold standard?

George Selgin: No.

Trevor Burrus: That happened—I mean, again, I’m picturing quirky gold standard guy in my brain, but did they kind of all slowly move off of it because they were constrained and wanted to inflate their currencies? Or would it be impossible for a gold standard country to exist in a world where everyone else doesn’t have a gold standard?

George Selgin: Well, I think to a considerable extent, the last statement is true. But what actually happened was that most of the countries that were on the gold standard went off in the course of the Great Depression. Now, it should be said that, in fact, those countries, most of them originally went off the gold standard during World War 1. And then between World War I and the Great Depression to the extent that they got back on the gold standard, they did so often in a kind of jury sort of way so that this gold standard that was reestablished, these gold standards reestablished after World War I were Rube Goldberg contraptions compared to the gold standards in effect before World War I and they were very fragile.

In any event, the depression caused them all to break apart one after the other. And, in fact, although the United States left the gold standard itself in 1933, it did so only partially. It never allowed its citizens to again convert paper money into gold. However, it did resume gold payments for foreign central banks and it continued to do so in its capacity as the supplier of reserved currency under the so-called Bretton Woods system. So, the US remained to a limited degree on the gold standard until it was finally taken off completely in the early years of the Nixon administration. So, in fact, we remained—we were the last gold standard country, though we were so only to an extent that was much more limited than had been the case before the Great Depression.

Trevor Burrus: Now a lot of people would describe going off of the gold standard as I mentioned that it was governments I mean conspiring with the Bretton Woods, attacks on Bretton Woods. But governments conspiring to break the boundaries, break the confines that gold put on their ability to inflate the currency in order to do more spending in more pernicious things. Is this accurate would you say to some extent?

George Selgin: Well, there’s no need for the word conspiracy—

Trevor Burrus: Well, just getting together and planning I guess is a conspiracy.

George Selgin: —because the fact is that in the case of Bretton Woods, what happened was the US had found itself its dollars being treated as the official reserve currency of other countries. So, the gold standard for all those other countries survived only in the sense that their currencies were convertible into dollars which were ultimately convertible into gold, but not by you as citizens would buy in foreign central banks and foreign authorities.

So, what happened though was—what you might expect to happen in a situation like that, being in the position of supplying the world’s reserve currency means that a central bank can issue more if its liabilities can expand and doesn’t face any immediate necessary requests for redemption because its IOUs are themselves being treated as reserves. Gold may be the ultimate reserve, but for a while at least, other central banks would be happy to sit on the official reserves and not turn them into ultimate reserves of gold.

Well, though, as prices rose in the ‘60s because the Fed was issuing more money in part owing to physical pressures from the Vietnam War first and the great society afterwards or along with it, the French in particular started to cash in their gold chips. And this is what broke down Bretton Woods because our IOUs, the Fed’s IOUs promises had expanded but its gold reserves were limited. And ultimately, to prevent, to avoid running out of gold, they suspended payments much as they had done in the ‘30s, but this time for foreign governments as well and that was that.

So—now the real problem here isn’t conspiracy. It really boils down to the different status of a central bank compared to a private bank as I mentioned before. A private bank simply couldn’t say, “Well, we’re not going to pay you anymore,” or even, “We’re going to devalue.” Even today, you go to your bank of deposit, forget about deposit insurance. That’s not the point, but suppose you go to your bank and you say, “I’d like to cash—I have a thousand dollar deposit balance and I’d like to have my money back.” Now, what that means today is that that bank owes you a thousand dollars’ worth of Federal Reserve currency.

But suppose it said to you, “Well, I’m sorry, we’ve had a devaluation. So, your $1000 of deposit credits are now only $500 in Federal Reserve now.” Well, no, they can’t do that. That’s called default. That’s failure. They close. There’s no two ways around it and this is how it’s always been for ordinary commercial banks. They simply don’t have the right to decide to pay less because their liabilities are true genuine liabilities, promises to pay. They’re solemn promises. The courts insisted they’d be honored or there are consequences.

But, a central bank—it’s a time for people to realize this because it was a long period when central banks were not really sovereign entities. They were private and they acted like private firms, but eventually as they got more and more, let’s say, cozy with governments, they acquired the sovereign immunities of governments themselves. And at that point, they could say as the Fed said in 1970, “Sorry, we’re not going to pay” and nothing happens. The bank doesn’t get wound down. It doesn’t get closed. The shareholders take no losses. There’s no inquiries. There’s no liquidation. There’s no receivership. None of that happens.

And, of course, what that means is the temptation for central banks to accommodate governments when the governments lean on them is great because the repercussions for the central bankers are minimal and this makes a huge difference. And that’s what happened in the case of Fed in the ‘70s and many other central banks before and since, that although they start out with a commitment to a fixed exchange rate whether metallic or otherwise could be some foreign currency fixed exchange rate. There’s not much holding that thing together because there’s not many penalties for and by a central bank that dishonors these commitments. And these, by the way, to segue, this is one reason why restoring a gold standard today would be very, very difficult.

Trevor Burrus: So, that brings up the question too of the relationship between the Fed and the gold standard and maybe we sort of need to explain exactly what the Fed does but they’re often talked about together and you say, “Well, we used to have the gold standard and now we have the Fed, but we had the Fed and the gold standard at some point.” And that’s possible, maybe not desirable but it’s at least possible.

George Selgin: Absolutely. Central banks can coexist with metallic standards, but they don’t tend to do so for very long for the reason I just explained. The fact that there are no serious repercussions for central banks at least once they obtained the status of sovereign entities were treated by the courts as such. At that point, the jig is pretty much up. It’s just a matter of time before the promise ceases to be worth anything.

Trevor Burrus: So, which is the first problem if you were to—

George Selgin: Central banking is the first problem.

Trevor Burrus: Which one do you need to—what domino do you need to fall first to start getting—

Aaron Ross Powell: In order to fix our monetary system?

Trevor Burrus: —fix this monetary system, yeah.

George Selgin: Well, OK. So let’s just step back a bit. You could have a gold standard without a central bank and you can have a competitive banking system like the Scottish system where the banks are all commercial banks. They issue the paper money, but that’s a commercial promise just like your modern bank deposit and that will hold together. That will be—that will tend to endure it. Then, there will be bank failures and so on. But—

Trevor Burrus: Is it there won’t be or there will be?

George Selgin: There will be. Of course, sometimes it will fail.

Trevor Burrus: Yeah. Well, that’s just competitive failure.

George Selgin: But, there’s no tendency for the whole system to give up on the gold standard at the same time. There might be crises, of course. But the nature of the underlying contracts as such is actually rather difficult to not have the thing stay together because you have to rewrite contracts and unless you’re talking about sovereign entities, that’s not so easy to do. As soon as you monopolize currency issuing privileges in a privileged institution, whether you call it the central bank or not, you’re already on the slippery slope where the longevity, the survivability of the metallic standard that it’s all supposed to be based on is now in doubt because as soon as sovereign immunity attaches to the promises, then there’s a grave risk that they’ll be dishonored and eventually they will be and that’ll be that.

So, going back to the question, you know, how do you fix things, that’s a very difficult question and now they’re really two different questions. What should we do to fix our present monetary system? And what would we have to do to get a metallic monetary standard back in place? And I hinted that before, the answers to those questions are not necessarily the same. Indeed, I personally don’t think going back to a metallic standard is even worth trying. I have to be very careful because I don’t want to overstate the case. Certainly, I don’t want to dismiss contrary arguments by reasonable gold standard fans and there are plenty of them.

But here’s what I see is the problem. In order to affect the change to the gold standard, first of all, it isn’t enough to do as some people have suggested to merely make it legal for people to own gold and open bank accounts based on gold. Some of those to some extent these things are legal, first of all, but even if there were no barriers to the use again of gold as a monetary medium to barriers to private coinage to having banks that have gold deposits and so on. The problem with the spontaneous development of a new gold standard is the same problem faced by any potential rival to an established monetary standard. It has to compete with a well-established standard and it confronts massive network disadvantages of network economics.

In doing so, that’s a fancy way of saying a monetary standard is as useful as the size of the network of people already using it. It’s rather like being on a telephone system or computer network in that respect.

Trevor Burrus: So this is like, what, say, Bitcoin is—it was dealing with.

George Selgin: Well, yeah. Yeah.

Trevor Burrus: Because only two people use it. But now, more and more people are using it.

George Selgin: Well—and I’ll talk about that in a second. I was going to allude to Bitcoin because it’s a good case in point. In any event, if you’ve already got a standard—today, in the US, we have the fiat dollar administered by the Fed. That’s accepted pretty much by everyone, not only by everybody in the US economy but by large numbers of people elsewhere. That’s a tremendously large network and a very hard one to compete with. And even though, even if it were true that a gold standard once established in place of a fiat standard would be better in some respects. It doesn’t follow that it’s better right away to any individual consumer because its small network size alone makes it inferior, right?

So, that’s why I’m very doubtful that any degree of liberalization of laws to provide for choice in currency would itself suffice to cause a parallel gold standard to take off and eventually to replace what we’ve got. So that thing aside. Could I keep going?

Aaron Ross Powell: Yeah.

George Selgin: Do we still have time?

Trevor Burrus: Keep going, yeah.

Aaron Ross Powell: I have a follow-up question.

George Selgin: OK. So, then what’s the alternative? The only alternative is that there should be an official attempt to reinstate the gold standard, right? Well, what does that mean? The only sense I can make out of such an official attempt is that there would be a legislation that would tell the Fed to once again make its dollars redeemable into gold and equip it with the necessary gold reserves. Which the Treasury could easily do, if the gold is Fort Knox that it claims is there, for example; pick the right rate of conversion and so on.

Now, though, there are two problems or two possible problems. There is a rate of conversion such that you could make every unit of money in the economy 100% backed by gold or every Federal Reserve dollar on the Fed’s books 100% backed by gold. But, that would almost certainly entail a very dramatic change in prices in deflation. Just look at it this way, right? If we take the present price of gold and figure out and compare that to what amount of gold we would have to make the Federal Reserve dollars’ worth if they were each to be fully covered.

Trevor Burrus: Like one—so it’s about $1000 an ounce, right?

George Selgin: Yeah.

Trevor Burrus: So, a dollar would be 1/1000 of an ounce.

George Selgin: Yes. You have to take the amount of gold that the Treasury could provide to the Fed and the amount of dollars that Fed liabilities that presently exist and imagine what the price of gold would then be. One way or the other, you’re going to have a very disruptive change and we do that now. If you allow for fractional backing of gold, then of course you could do it without that disruption, but then you’d have this other problem.

Trevor Burrus: Like the Scottish that you’re saying.

George Selgin: Oh, yeah, subtraction. But then you’d have another problem because it’s the Fed and the Fed no longer has credibility. No one would trust the Fed. If you told me that as of tomorrow, my Federal Reserve notes in my wallet, I could go to the Fed and get a certain amount of gold for them, I’d go and I’d get the gold because I know there’s absolutely no chance that the Fed is going to revalue its notes so that they end up being worth more than the gold and then I’d regret what I did. But I know for sure that there’s a positive value, I don’t know what it is that the Fed is going to do what it’s done in the past and it’s going to devalue or suspend and turn back the fiat money.

Moreover, I know other people are thinking this. So, they’re going to go and even if the Fed wasn’t planning anything, between us, we’re going to force it to devalue. We’re going—in other words, we’re going to stage what’s called a speculative attack as what brought down the Thai baht and the ruble and the British pound and a million other fixed exchange rates in the past, not to even go back to previous gold standard devaluations. So, spontaneous order won’t do it. 100% reserves, forget about it. Official fractional reserve-based gold dollar won’t last.

Aaron Ross Powell: As far as letting alternative systems—so we’re not—we don’t talk to government. The government doesn’t formally switch to a gold standard or any other currency whether, you know, the government agrees and adopts the Bitcoin or whatever. But we, you know, it emerges and develops in parallel. Is there a point at which it can’t become the kind of default system that everyone is using because of income taxes? Like the government has to at some point—we have to pay taxes to the government, so if the government decided it’s only going to accept dollars, it’s never going to accept Bitcoins, it’s never going to accept gold or whatever these alternatives are, then we’re kind of locked into using those?

George Selgin: Yeah. You remind me that I meant to say something about Bitcoin as an example. Bitcoin is fascinating because it’s taken—it does have a foothold in the world of currency, but let’s face it, it’s tiny compared to the dollar network. Moreover, right as we speak, other black chain-type cryptocurrencies that have noted the advantage of the established network money are competing effectively with Bitcoin for payments, remittance and other things that Bitcoin does very efficiently and doing it successfully by being dollar-based.

Trevor Burrus: So, on Aaron’s question, though, like if—let’s say something happens where Bitcoin—let’s talk about, I mean, for example, Venezuela. Right now, it’s experiencing a hyperinflation. And, it seems that something like Bitcoin if they could be using that in their—you know, to get around the currency, but when they have to pay taxes, they might have to use the Venezuelan money.

George Selgin: I didn’t want to ignore the question, yeah.

Aaron Ross Powell: Or if there’s—or if there’s employer tax withholding, and my employer has to pay me…

George Selgin: Yeah.

Trevor Burrus: Yeah.

George Selgin: Well, the action—

Trevor Burrus: Is that why it would never be able to take over?

George Selgin: No. First of all, it’s true that when you have a crack-up hyperinflation like Venezuela’s, that of course is the one exception to the rule that the established network money is preferred to others because the depreciation rate is so bad that the demand for—that the network is no longer attractive, right? That happens. It’s very rare. And by the way, some gold standard fans seem to be looking forward to a hyperinflation in the United States so that that can happen here. That’s another solution to getting the gold that I’d rather—

Trevor Burrus: Avoid, yeah.

George Selgin: —I would rather avoid. I don’t like it, not because it might not work but because I just wouldn’t want anyone to have to go through it, and I certainly don’t think it’s something we should wish for. But, that’s for the tax argument. I think people have—many people including economists vastly exaggerate the role that receivability of a money in taxes plays in driving the general acceptability of that money. It’s true, of course, that governments are big players in their economies. And to that extent, they are big contributors to the network effects. So, yes, if the government accepts its official money and official money in payment of taxes, it’s going to give a big advantage to that compared to other moneys.

But, although governments are big, there are other big players and so tax receivability alone is not by any means usually sufficient to guarantee that the money that’s still receivable will outcompete others. Remember that if enough people prefer other moneys, they can always—they can always treat the official money as something they’d buy just for the purpose of paying taxes.

Let me make an analogy. Suppose occasionally you like to buy some goods from France, all right, what do you do? Well, when you have to do that, you go and you get a money changer to give you some francs and you buy the goods from France. The same thing could be done, let’s say, of an economy where the governments got some crappy money and it says you can only use this to pay your taxes and everybody else prefers to use Bitcoin. Well, most of their purchasing and stuff they’re doing with Bitcoin but every once in a while, they go and buy some, you know, Venezuelan stuff just to pay taxes even that’s its only use. And they just do the spot exchanges, right? It’s not going to do much for the value of the stuff. It’s just going to—you know, they’re going to be in and out of it.

And that’s that. So, people should not exaggerate the extent to which governments nearly by using the power of determining who can—what can be used to pay taxes that they can prop up their moneys to any considerable extent. That way, it’s—in my opinion, that’s a fallacy though it’s one that economists, too many of them, cling to.

Trevor Burrus: So we’ve discussed the problem—the gold standard and the problems with putting it back into place and then we have this concern of—as you brought up, of inflation and currency collapse. And a lot of people who talk a lot about monetary policy especially the ones who corner you in bars and stuff like this talk about, you know, you better get your money into gold because in two years, the dollar is going to absolutely collapse. And they do kind of seem to wish it’s going to happen.

George Selgin: Yeah, that’s the thing. Sometimes there’s a thin line between saying that that’s inevitable and wishing it would happen.

Trevor Burrus: Yeah. But how scared are you of this? I mean, you know, is this something that you think is a possibility if we keep going the way that we’re going in terms of the way we print money and the way that we have a Fed? Is this something that you’re like yes? I mean do you have gold buried in your background, George? Come on. That’s what I want to know and I want to know where it is.

George Selgin: If I do—actually, I don’t because I don’t have a backyard. Well, I have a backyard back in Athens. And if I have gold there, I don’t know about it. It’s possible, you know. I could be the next Sutter. My property could be the next Sutter’s Mill for all I know. But, no, I didn’t put any gold there. Well, look, the answer to that question would vary depending on what country the person you’re asking it lives in. Here in the United States, do I think that we’re in for a hyperinflation anytime soon? I don’t. I don’t.

Fortunately, our institutions are such that the public dislike of inflation does, in fact, translate into the Fed and the government, between them to consider them as a unit, are not prepared to put up with a backlash they would get if they were to allow a lot of it, at least not under present circumstances.

Trevor Burrus: But what—so that what do you see happening in the short and maybe—maybe stage of short-run? In the long-run, we’re all dead. But, in the short run, with the system we have, what is the—even if we don’t have the—you know, like I said, we should have the gold standard. What is the biggest danger that looms?

George Selgin: In fact, I just wrote an op-ed about what I consider to be the biggest danger this morning. And it is indeed a danger of excessive Fed monetization of government debt in deficits. But, the reason it’s a danger and a bigger one than we’ve had in the past is precisely because this time around it’s possible the Fed could do these things and not generate the inflation that would in turn cause a backlash. And its capacity to do that, its new capacity is a result of its ability to pay interest on bank reserves which is a power it gained in the course of the last crisis and has been using ever since.

So far, it has used that power as a device that allowed it to buy or add 3.7 trillion dollars to its balance sheet without causing inflation. I don’t want to give the wrong impression. It had a lot of help from the fact that it was after all dealing with a depressed economy and exceptional liquidity demands. But in principle, paying interests on reserves is also a device for containing or rather—for containing inflation by simply encouraging banks to pile up reserves instead of lending them. What I’m worried about is that in the future, a Fed pressured to monetize the government’s debt and we are, after all, looking forward to a Trump administration that could cause that debt to go that way up by trillions of dollars in a decade.

The Fed now that it’s armed with this new tool might be more inclined to cave in to pressure from the administration to monetize debt knowing that it has this tool by which it could prevent that monetization from resulting in inflation essentially by causing the banks to pile up reserves. So what it does when it does that is basically shuns the public savings from bank lending to productive industry and other purposes to lending to the government. So, it’s grabbing the savings in the same—the government grabs the savings in the same way it would—if they were outright inflationary finance.

But, ironically enough, the fact that this is going on is actually less obvious to people than it would be if they were inflation because in order for them to recognize what’s happening, they have to be cognizant of the accumulation of bank reserves, the decline in bank lending and multiplier and all that and the role of interest reserves. That’s a lot for people to digest. It took them a long enough time to figure out that inflation was related to deficit financing and to, therefore, object to it. It certainly would take them a long time to figure out this new method of shunting scarce savings to the government in order to gobble up paper over its deficits and I’m really worried about that.

Trevor Burrus: If you’ve enjoyed listening to Free Thoughts this past year, I encourage you to go check out’s Facebook page where you can vote on your favorite episodes of 2016.

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