The Free Market 16, no. 12 (December 1998)
Speaking before a Congressional committee, Alan Greenspan stepped back from his discussion of the newest international currency crisis to reflect on the gold standard of the last century. He noted that bad judgments and distortions in price had a way of working themselves out very quickly. Interest rates would rise and fall to reflect shifts in capital flows and thus minimize the losses associated with economic change. Imbalances corrected themselves.
What happened to the gold standard? As Greenspan put it, “following World War I such tight restraints on economies were seen as too inflexible to meet the economic policy goals of the twentieth century.” What those policy goals were, Greenspan did not spell out. Let’s fill in the blanks.
The end of the gold standard dates from the founding of the Federal Reserve itself. It was created in 1913 to permit the banking industry to coordinate its credit expansions to prevent the kind of contagion we’ve seen internationally from occurring domestically. The Fed was a bankers’ tool above all else.
How does government fit in? In financing Woodrow Wilson’s attack on “The Hun,” the Fed proved to be a useful money-creation machine that allowed the government to spend without taxing. Risk-free debt instruments could pile up without end because they are guaranteed by the power of the central bank to create money. This proved indispensable as the funding device for the unlimited growth of the welfare-warfare state.
After the war, economic crises became worse, as the Fed spread its false interest rate signal throughout the entire economy. With each new crisis, presidents used their power to make the dollar’s link to gold weaker and weaker. The weaker the link became, the more the Fed was free to work with the government to expand without limit.
The ideological forces of socialism and social democracy grew in tandem, as did the regulatory state. The result was a revolutionary change in the regime. The American people could once go about their lives nearly oblivious to the existence of the federal government. Now they would be controlled by it in all aspects of their lives.
But the policy goals that followed the breakdown of the gold standard have left enormous destruction in their wake. Inflation devastated the middle class and transformed the structure of the family. The welfare state corrupted the morals of the lower class. Cheap credit got American business hooked on debt finance. The ability to fund wars turned the U.S. into a global empire.
The philosophy of government that Greenspan alludes to is the theory of the egalitarian, redistributionist state, in which no property is outside the grasp of the leviathan and no aspect of our economic lives outside its control. Fiat money is the financial foundation of all aspects of the social democratic welfare disaster.
One of many things government could not do under a gold standard was engage in willy-nilly bailouts of bankrupt foreign governments. Every government in the world would have to obtain its financing through the private sector, with its bonds subject to a market-based risk premium.
Greenspan is often given credit for running a sound money program at the Fed. And given his favorable comments about the gold standard, one might expect he might go along with a different attitude toward government. Trouble is, he’s on record favoring these dreadful international and domestic bailouts (even as he warns about their moral hazards).
People say it is unrealistic to seek the restoration of gold as the foundation of the American monetary system, since that would require a complete rethinking of the nature of government. In fact, that seems to be happening all over the Western world, as the political system is increasingly seen as inherently corrupt, wasteful, intrusive, and tyrannical.
The government didn’t create the gold standard. The free market chose gold as the foundation for the monetary system because of its inherent qualities. Gold created a firewall between the government and the people’s economy. That’s why governments, working in cooperation with central banks and special interests, destroyed the gold standard. It’s also why restoring it is not just a much-needed program for monetary reform. It is a program for restoring liberty itself.
