Any Return to a Gold Standard Begins With Civic Virtue
For several years, I have been chewing over political paradigm offered up by Professor Michael Sandel from Harvard University. He is the author of Democracy’s Discontents: America in Search of a Public Philosophy, a tome that decries the present, shallow political discourse and contends that – for all the vitriol – Democrats and Republicans are birds of the same political feather. As the GOP blasts an over-weaning government and the Democrats lash out at the greedy rich, they are preaching the same sermon to different choirs: your desires and dreams – your rights, in fact – are under assault, and we will defend you. Sandel summarizes it this way:
Republicans sometimes argue…that taxing the rich to pay for welfare programs is a form of coerced charity that violates people’s freedom to choose what to do with their own money. Democrats sometimes argue that government should assure all citizens a decent level of income, housing, and health, on the grounds that those who are crushed by economic necessity are not truly free to exercise choice in other domains. Although the two sides disagree about how government should act to respect individual choice, both assume that freedom consists in the capacity of persons to choose their values and ends.
Sandel believes that politicians of all stripes have fostered a hyper-individualism that ignores the most important component of true liberty: self-government. For self-government to work successfully, citizens must participate in the civic arena knowledgably. This condition, in turn, must be presupposed by shared set of virtues, the possession of which then calls into question the individual sovereignty over values and ends. It is a small-r republican understanding of freedom that, the professor argues, faded from dominance in the mid-20th century. In its place has reigned what Sandel refers to as the “procedural republic” – one that eschews any concept of a common good, but rather bases practical government on the recognition of individual rights.
In so doing, the procedural republic – perhaps inadvertently – maintains a dynamic where power flows to Washington, yet – once there – is more likely to concentrate in the federal courts and the bureaucracy as opposed to the elected officials sent there to govern. This is because a rights-based political system will devalue the concept of majority rule, thus minimizing the role of those empowered by majority – or at least plurality – votes. Under this dynamic, the appointment and confirmation powers are granted exaggerated importance as unelected boards and panels assume greater unilateral authority. Nowhere is this more pronounced than with the Federal Reserve Board.
This brings us to the topic at hand: the superiority of the gold standard and why it cannot work…yet. Talk about the gold standard has revived since the inception of the current financial crisis. Most of the commentary is critical, favoring the present system of fiat money, the value of which is manipulated by “experts” in the Fed’s Open Market Committee. We are told that this arrangement smooths the rough edges from the business cycle, better controlling the ill effects of both inflation and deflation. Fed officials themselves point out that – for all the hype – business cycle downturns have not resulted in depressions for the last 50 years, whereas six depressions afflicted the US between the end of the Civil War and the start of World War II. They further contend that the counter-cyclical macro-policy enabled by fiat money is responsible for such stability. Implied here – when not stated explicitly – is the argument that a pro-cyclical tethering of the dollar to the gold reserves will generate widespread financial instability, alternating between extreme inflation and destructive deflation.
While such a scenario can be constructed and projected onto the future, a side-by-side comparison of the “classical” gold standard period – 1879 to 1914 – with a period when fiat money dominated – 1949 to 1979 – shows greater stability under gold. A Cato Institute policy report demonstrates the following:
The economic historian Hugh Rockoff, in an examination of the output of gold, concluded that "it is fair to describe the fluctuations in the supply of gold under the classical standard as small and well-timed." He found that supply of fiat money in the postwar United States (1949–79), by contrast to the behavior of gold under the classical gold standard, had both higher annual rates of growth and a higher standard deviation of annual growth rates around decade averages.
In a study covering many decades in a large sample of countries, the Federal Reserve Bank of Minneapolis economists Arthur Rolnick and Warren Weber similarly found that "money growth and inflation are higher" under fiat standards than under gold and silver standards. Specifically, they reported, "The average inflation rate for the fiat standard observations is 9.17 percent per year; the average inflation rate for the commodity standard observations is 1.75 percent per year."
True, under a gold regime, the amount and buying power of money is constrained by the supply of – and demand for – gold itself. Yet if history is any guide, a more (politically) flexible fiat system does not yield any superior control of fluctuations, at least not in the long term.
So why is a return to gold considered so foolish, even deviant? There are other objections, some ridiculous, others more legitimate. However, my suspicion points me to the slow-motion renunciation of Jeffersonian republican virtue among Americans over the last 75 years. Professor Sandel reminds readers that the civic model offered by the procedural republic was initially seen as a boon to self-government:
As the procedural republic took form after World War II, Americans did not experience the new public philosophy as disempowering. To the contrary, in the day of its arrival, the procedural republic appeared not as a concession but as a triumph of agency and self-command. This was due partly to the historical moment, and partly to the liberating promise of the voluntarist conception of freedom.
In other words, the procedural republic teaches that our liberty is enhanced when government – presumably on our behalf – extends its agency (and agencies) and its power to animal spirits that we would otherwise be subject to. When government vanquishes these forces – such as the market value of gold – we feel more liberated to pursue our own objectives. What goes unnoticed is the dependence then ceded to unelected experts who daily demonstrate the futility of their expertise.
Under fiat money, thrift is good but not as urgent; frugality can help, but also hurt; hard work and industry may or may not be worthwhile. What were absolute virtues under classical liberalism are conditional under modern liberalism. Challenges to a gold standard resurgence begin at home, and Americans must begin to see these virtues and their companions – patience, moderation, tranquility of mind, and independence – as vital and necessary, not just desirable. They do not stand in opposition to risk-taking and sound investment strategies conducive to economic growth. Far from it, these values – if properly inculcated – are sure foundations for such beneficial behaviors. Sadly, leadership in the area of civic virtue is sorely lacking at all levels of government.
Stay tuned for a follow-up piece on the equally essential need for free banking.
