Conversation with son Alex

Our last conversation got me thinking about the gold standard. It bothered me that there appears to be a conflict between the libertarian stand on economics (me) and that of the humanitarian (you).

Put simply: one of the main consequences of a gold standard is the avoidance of wholesale, dilutive, money-printing by the government; but, in times of war or plague, when all the state’s resources are allocated to fighting the ‘enemy’, failure to inject unbacked money into the economy would leave whole swathes of the population in dire circumstances – including circumstances caused by economic damage inflicted by the government’s own ‘fire-fighting’ strategy.

Thus, even though unprecedented levels of inflationary money-printing inevitably lead to a severe loss of that money’s purchasing power (and, which is the same thing, a huge increase in prices), at least in the short term people will not be left starving. That, I think, is the humanitarian view you were expressing: the inescapable economic logic of the effects of money-printing is one thing; but the need to help people cope with the hardship in a severe crisis is quite another.

How to establish priorities?

Instinctively I’m sure there is something utterly wrong with expressing the conflict in these terms. The appearance of a choice between the opposing positions of (i) a policy of sound money and (ii) a policy of heartless abandonment of citizens suffering through no fault of their own, can only mean that the problem is not properly understood because it poses a binary choice between extremes and ignores the middle ground of common sense.

Libertarian “middle ground” when introducing a gold standard 

When we talk about a gold standard, we are talking about establishing a relationship between circulating money and gold reserves. This does not mean that government would need, overnight, to back every currency unit already in circulation with a specific amount of the nation’s gold reserves. The existing relationship between currency units and gold, the status quo, can be left as it is, and existing gold reserves would simply be held as a base to give the markets confidence that the ratio of currency units to the gold reserves can be maintained.

What matters is that any further issue of currency must be fully backed by additional gold reserves. What would otherwise have been an issue of “fiat money tokens” becomes an issue of “gold substitute tokens”, convertible into gold coin at the holder’s option. 

Government spending would be restricted, having to be financed by taxation and genuine savings (reserves) rather than by monetary inflation via the printing press. If it fails to restrict spending in this way the markets will in time force it to devalue its currency against gold, thus pushing up prices.

Humanitarian “middle ground” under a gold standard

Principles of sound money in action will highlight the importance of private sector productive activity and the distorting effects of government intervention that serves special interest groups while failing to satisfy the needs and wants of consumers. Implicit in the functioning of a system of sound money is the elimination of wasteful expenditure on fantasy projects using taxpayers’ money, and the need to moderate free-for-all unrestricted welfarism, keeping it to an affordable level. We know that this is inconceivable to the masses who have grown up with it, but if the incalculable benefits of sound money are to prevail, the excesses of a socialist dependency culture (and its resulting free-for-all culture of “total expectancy”) will need to be culled. The maintenance of sound money is incompatible with debilitating taxes and a return to dependence on a magic money tree. By way of analogy, our overseas aid budget is at least partly motivated by humanitarian considerations, and just as that has to be restricted to an affordable level, the same principle must apply to domestic welfare.


Are we getting anywhere near a consensus?


Thanks for the challenge