AEI’s James Pethokoukis Takes a More Temperate Tone Toward the Gold Standard

"James Madison" by Gilbert Stuart, 1804.
“James Madison” by Gilbert Stuart, 1804.

At AEIdeas, columnist and blogger James Pethokoukis again returns to a favorite topic, the gold standard. In “The deep myth at the heart of the gold standard,” Pethokoukis writes:

One political/policy fallout from the Global Financial Crisis — and the accompanying monetary easing and rise in public debt — has been the reemergence of the gold standard as something the center-right talks about. Unlike the fiat money US dollar, a gold-backed dollar — a dollar linked to something tangible — would prevent monetary mischief by government.

Pethokoukis is to be highly commended for adopting a more temperate tone toward gold than previously. He writes: “There might be a reasonable case for returning to the gold standard — I’m not a fan — but it’s really just another trust-based currency and should evaluated as such.” The proponents of gold would welcome an objective evaluation.

The excerpts he presents from a conversation between Russ Roberts and Yuval Harari of Hebrew University, however, implies a that there exists a fallacy widespread among gold standard proponents: that gold holds an intrinsic value.

I am well acquainted, both personally and with the works, of many, perhaps most, of contemporary gold standard sympathizers and advocates. Few, if any, hold to a doctrine of an intrinsic value to gold. That would, indeed, be a fallacy. But it’s not our fallacy.

Pethokoukis is close to correct that it really is “just another trust-based currency and should be evaluated as such.” That said, “just another trust-based currency” seems to imply trust in a form of discretionary, or as I frequently call it fiduciary, management. This is a slightly odd construct.

The same provision in the U.S. Constitution that vests Congress with the power “to coin money, regulate the value thereof, and of foreign coin” also vests the power to “fix the standard of weights and measures.” One does not naturally think of the work done by the National Institute of Standards and Technology to define the inch and the ounce (among other standards of weights and measures) as a function of “trust.”

Such definition is a technical matter. The dollar, too, is a unit of account. Unreliability in any unit of account creates economic drag and invites inequities akin to a dishonest butcher’s thumb upon a scale.

Proponents of the gold standard — defining the dollar as a stated weight of gold, convertible thereto — consider gold to be the optimal element for such purposes based on a variety of technical factors such as gold’s stable stock-to-flow ratio and its limited industrial consumption (which serves to stabilize demand). The BBC enumerated a number of these factors very well in a December 2013 article.

It also bears noting that in reading Madison’s Notes of Debates in the Federal Convention of 1787, a nearly verbatim transcript of the debates formulating the Constitution, that an earlier draft of this clause provided Congress the power to “emit bills” — meaning issue paper money. After a spirited debate about the perniciousness of paper money relative to gold and silver, this power of the federal government — a power also prohibited to the States — was deleted. It was not affirmatively prohibited partly because it was believed that the federal government would have only the powers enumerated and also, one infers from a footnote by Madison, to leave a little wiggle room for times of war.

The authors of the Constitution, although not infallible, were an exceptionally discerning group of thinkers. It does not fetishize the Constitution to take a posture of deep deference to the intellect of its architects and to lay a heavy burden of persuasion on those who wish to depart from the original intent (as evidenced by abundant historical documentation that goes far beyond the Federalist Papers, very much including their analysis of monetary policy).

These were brilliant statesmen. The Constitution is not an artifact. It is the supreme law of the land, and for good reasons.

The gold standard correlates very well with a long era of equitable prosperity in the United States. The chief proponents of the gold standard, such as Reagan Gold Commissioner Lewis E. Lehrman, publisher Steve Forbes, financier/philanthropist Sean Fieler (who chairs The Pulse’s parent organization), George Mason University professor Lawrence White, among many others, are far more invested in it for its demonstrated qualities of fostering equitable prosperity than as a means of restraining “monetary mischief” by the government (although it would also have that beneficial effect).

I, for one, would welcome the bright James Pethokoukis’s digging down into the real policy arguments being made on behalf of the gold standard rather than his addressing peripheral and even specious arguments that are hardly, if at all, in evidence. None claim that the gold standard is flawless. We merely hold that, based upon rather abundant empirical evidence, properly done the classical gold standard is — in the words of Lehrman — the least imperfect of monetary systems that has been tried from time to time.

There are solid technical reasons for that. I, for one, would welcome an opportunity to present to James Pethokoukis, over beer or spirits at a DC bistro of his choice (I’ll stand the first round), on or off the record, “the reasonable case for returning to the gold standard.”

Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles Project’s Senior Advisor, Economics.