click here to return to the Calico Cat homepage

Libertarians and the gold standard

The gold standard, or maybe more specifically gold currency, is strongly endorsed in Atlas Shrugged, Ayn Rand’s huge 40,000 page novel. (I may have exaggerated the number of pages by a modest amount.)

Because libertarians and other free-thinking contrarians have great reverence for Ayn Rand, they tend to uncritically endorse her views, and there seems to be a strong trend of “return to the gold standard” thinking among libertarians. And there is also the bad karma associated with our current fiat currency system, because it began with socialist Franklin D. Roosevelt, by executive order, confiscating all private holdings of gold.

The main reason why some support a return to the gold standard is because they have a rightful distrust of government. With fiat currency, the government can expand or contract the money supply to aid whatever political group holds the power. Normally, the tendency is for over-expansion of the money supply resulting in unchecked inflation. This has been the demise of many a fiat currency monetary system.

However, the confiscation of gold by FDR shows that the gold standard doesn’t really give us a permanent protection from the “looters” (to use Ayn Rand’s terminology). Even if we returned to the gold standard, what would stop another FDR from being elected in the future and abolishing it once again? The only true guarantee of freedom is an electorate that values freedom combined with a Constitution that protects freedom from the tyranny of the majority (something that our own United States Constitution has only partially achieved).

At the moment, there just isn’t enough gold to back the U.S. dollar at the current gold price of $402.60/ounce. The U.S. would have to engage in a massive gold buying program which would cause the value of the dollar to fall and the price of gold to rise until the United States had sufficient gold reserves. Once the world knew why the U.S. was buying, the price of gold would rise pretty quickly. This would amount to a massive transfer of wealth from the United States to those who own gold. How does this benefit the nation? A massive transfer of wealth based on a political decision is exactly the kind of government activity that libertarians should be opposed to.

Supposing the price of gold rose to $2000/oz (an amount that a lot of the pro-gold websites seem to think gold is destined to reach), and the world knew it would stay there because we were returning to the gold standard, then this would make gold mining a lot more profitable, and there would be a huge investment in gold mining. But all that gold mining would be worthless activity that wouldn’t enhance the world’s actual productivity. Instead of investing in new computer chips or new factories, people would be investing in digging metal out of the ground. In fact, this activity is more than worthless, it harms the environment because large amounts of sodium cyanide are needed to extract gold from the ore.

A return to the gold standard would benefit countries where there are large gold reserves, primarily countries in Africa. They would essentially be able to dig money out of the ground. A great boon for South Africa, but how does that benefit the United States? It doesn’t. The current system where the U.S. dollar is the world reserve currency benefits the United States, because we magically create new dollars, without any messy mining, and give it to the world in exchange for useful goods such as raw materials, automobiles, and most of the stuff you see on the shelves at Walmart.

Meanwhile, it looks like Islamic nations may have already beaten us to a gold standard. Malaysia is trying to promote a new gold dinar coin as a means of trade between Islamic nations. If it catches on, then Islamic nations would accumulate a large amount of gold. The economic productivity of all the Islamic nations, even in sum total, is pitifully small, so there is plenty of gold in the world to cover the currency demands of these nations. But if the United States then followed suit, this would have the effect of suddenly increasing the wealth of those nations, and that’s an undeserved transfer of wealth that I think is not in our interests.

While the gold standard may not make any sense for the United States, it will probably work quite well for the Islamic nations if they choose to go that route. Unlike the U.S. dollar, fiat currencies printed in countries such as Iran or Syria are obviously not trusted. So for Islamic nations with dubious governments, the use of a standard currency which is relatively stable and not under the control of any of their governments would undoubtedly increase economic activity in the region.

There are a host of other reasons why a return to the gold standard is impractical for the United States. Constant deflation, bank runs, and depressions (including the Great Depression) have all been blamed on the gold standard. Writing about all of this is certainly beyond the scope of this essay. Instead, I will end this essay with advice for Libertarians. Stop supporting extreme positions such as a return to the gold standard and focus on core issues such as reducing the size of federal government, lowering taxes, and deregulating society, the issues that Ronald Reagan supported but the current administration seems to have abandoned.

* * *

Disclosure: I own a pretty big position (relative to my net worth) in South African gold mining company Durban Roodepoort Deep (NASDAQ: DROOY).

posted Sunday, June 27, 2004