By Simon Johnson, April 1, 2013
In both 13 Bankers (2010) and White House Burning (published 2012, paperback just came out) James Kwak and I weighed the merits of going back on a global gold standard. In those books, we ended up siding with the prevailing fiat currency system – in which money is backed by nothing more than your confidence in central banks.
In the light of recent events – in the US and in Europe – I feel we should reconsider the arguments. On balance, I am now in favor of going back on gold for ten main reasons.
First, gold worked well for Winston Churchill in 1925.
Second, we have all had about as much as we can take with regard to us – i.e., the taxpayer – bailing out banks. Let’s go back on gold and turn the tables, as Grover Cleveland did in 1895, when JP Morgan (the man) was forced to bailout the US government with the famous “gold loan”.
Of course, the bankers could let us just go bust. But that would hardly be in their best interests. And the beauty of the gold standard is that it ties the hands of the government – forcing big banks to either lend at generous terms or watch their franchise value collapse (with the economy).
Third, eurozone officials have created serious confusion on the order of priority for claims when a European bank gets into trouble. With the gold standard it’s easy in a way that everyone can understand – no one gets anything when a bank collapses (and even less when world trade disintegrates).
Of course, in order to be truly effective as a way to stabilize the world’s economy, the return to gold would have to be combined with making deposit insurance illegal everywhere other than in Germany. The good news is that on the latter point, Jeroen Dijsselbloem and the Eurogroup of finance ministers are already far down the garden path.
Fourth, let’s face it – almost all the growth the world has experienced since 1945 has proved ephemeral. And inflation has increased almost without limit since President Nixon broke the final bonds between dollar and gold in 1971. We have experienced undeniably the worst 60 years in human economy history – all since we turned our backs on gold. The sirens of gold are just as right now as they have always been.
Fifth, of course the nay-sayers always bring up the Great Depression, and argue that the gold standard played an integral role in both the banking collapses and the breakdown of international payments and trade. But seriously – how many of today’s supposedly astute observers were really there, and therefore know anything at all about what happened?
We should all apply the principles recently established by JP Morgan (the company) with regard to studies of “too big to fail” subsidies – if there is any margin of error in the estimates of any kind, we should disregard the evidence fully. This will greatly simplify many things, including science, the pages of our leading newspapers, and refereeing for academic journals.
In any case, reports of the severity of the economic slowdown in the 1930s have been greatly exaggerated. Among other things, that decade provided ample time to rest up before the hard working 1940s.
Sixth, with regard to the conventional concern that “there is not enough gold to accommodate world growth without a falling price level”, we should simply apply some of the more compelling modern financial innovations. We can create synthetic gold – for example using iron pyrite – and have governments trade that, building on the “success” of existing gold exchange-traded products that do not in fact involve any gold.
Seventh, the fact that high profile people such as Glen Beck endorse gold should encourage us in the same direction. After all, Mr. Beck is a busy person with many well remunerated activities. If he chooses to spend time with gold, the market is telling us something.
Eighth, you should read this book by Gillian Tett. The title tells you everything you need to know about many things.
Ninth, while the Financial Services Roundtable has not weighed in yet on this issue, once they figure out the subsidies angle, they will be all over it (hint: those gold loans to the government are highly profitable and debtors more generally get crushed as a matter of routine). Anyone opposing the lobby will be ridiculed, rolled over, or bought out, so why not get on board now?
Tenth, currency convertibility should be suspended every April 1st at least momentarily. That might help remind us of the crazy things we have done in pursuit of a supposedly more stable currency and more prosperous financial system.
Correction: due to an editing error, the original version of this post did not make it sufficiently clear that the end of Bretton Woods broke the gold-dollar link and ushered in the chaos of the modern world. This has now been corrected. (h/t: David Stockman)
The Baseline Scenario 
You could have written this any day of the year, not just April 1st. You are apparently incapable of learning the obvious lessons about fiat currency from the Cyprus disaster, or have you figured a way to blame that on gold?
@John – Ummm, if anything, the Cyprus crisis shows the exact problems of a gold standard. The Cypriot central bankers don’t control the flow of the Euro. For Cyprus, the Euro isn’t at all a fiat currency.
But really, the Cyprus crisis shows the problems of trying to be a real economy based on being a money launderer for Russians.
am loading up on gold
Very funny :)
April fools’ day, right?
PS: I have read the both mentioned books!
Why yes it is. And yes, it does no good to go on any standard if you have none of the commodity which is to be used to back your currency. That’s was the primary reason for leaving gold in 1971. What they call it now is full faith and confidence in credit of the Fed. But we also know the Fed has CREATED the biggest credit bubble in the history of the Fed, and as soon as the dry powder confidence goes away, so will the faith in the U.S. currency and credit. A definite crying shame at the least.
Even I won a raffle for the chance to run a race against Richard Petty. When the day came, he reneged, and said “You ain’t got much to do huh?, beat it music boy, i’m retired” I responded by saying “Well that is like a sore prick, it’s(and you)/were, hard to beat” and laid some more music to his ears.
You had me going there for a minute. I thought maybe you had been hacked. Then I read the argument about Glenn Beck and it clicked. April’s fools!
Yuup, tomorrow’s a whole nother day.
hey, for those of you who long for the gold standard; the euro is your currency; it puts the peripheral countries into the same bind as gold and is probably even tougher to leave.
How about we use the gold standard one day every year – like April 1?
THATS IT
IM SHUTTING OFF MY INTERNET TODAY.
can’t take anymore of these damn jokes!
but you only had me going for the first two paragraphs. (and im sticking to it)
Might as well assert that a standard 12 inch ruler is the cause for the pain in Subway’s “Foot Long Sub” sandwich business (since they seem to
be having trouble producing 12 inch sandwiches, yet remarkably
never error in favor of the customer).
Constraints on dishonesty are always blamed on the constraints by the dishonest…because otherwise, they’d have to blame themselves for clipping the coinage.
In other words, the gold standard doesn’t work only because grease
in the system is graft and skim, and if you don’t grease the system, it locks up. However, there is no leap of logic that can conclude a gold standard is the problem. We have met the enemy, and it is us.
***** out of ***** for humor (As we know you intended it to be)
And they say University professors are drab. Balderdash!!! my friends!!! Balderdash!!!
Seriously though, how do I get Glen Beck’s gold endorsement contract to sell my own radio listeners up s.h.i.t.Creek?? Think of the personal satisfaction of going to sleep every night knowing you’ve screwed your very own fans. It must be so grand not having even a smidgeon of personal integrity. Mitt Romney is kind of like that:
Scruggs and Flatt do it better!
http://rt.com/usa/banks-big-us-laundering-165/
Seems there is something that works better than gold in “…dem thar hills…”
And all of “health care” is also laundering!
What a filthy disgusting craven-savage world of players. Ugh. Bullet to the forehead with all the remorse of taking out a cockroach…
JUST WAR. They’re not too big to unravel. One shot and the next sucking sound you hear won’t be the SS fund disappearing….it’ll be them falling into their derivatives black hole box.
It’s always just war with you for some reason, damn cock suckin bloody butt bigots at their best until death do we bury at any cost, regardless of the consequences at hand., and the sooner the better too.
The Gold Standard has its problems, but it can’t be as hard to manage as this Fiat Currency. The cost to the government and other organizations of storing all those Fiats, at 80g/dollar, is a major disadvantage. Furthermore, the oversized influence Italy has on the world economy due to having the company incorporated there is very distorting. While many would agree that tying money supply to industrial production is a sensible course, picking a single arbitrary producer as the indicator of present global wealth is as crazy as using the DJIA. Of the options that have been proposed so far, the Ford-Fiat-Toyota Standard is the most logical one, but I have some personal reservations about it, as I only know how to drive Automatics.
Finally, the voice of reason!
Thanks Simon — I really enjoyed that!
Gold will do no better than paper; we must fix the bookkeeping that has never been properly programmed into computer software. A proper book-of-accounts delivers a hard proof of the validity of bookkeeping’s statement and balance sheet. There is no software program to date that accomplishes this seven centuries old tradition. Gold, in a computer-driven culture, ought not be necessary, once the proper accounting is in place. Bookkeeping can do the job! Unfortunately, we appear to be way too dumbed-down a culture to recognize our folly.
@Dan – man to land ratio – bookkeeping has to be attached to reality.
There is NO CULTURE on the planet that gets it, so I’d stop saying USA is the only problem – even the Native Americans bottom-lined it – 100 of us, 1000 buffalo.
Spending trillions on “stuff” that can’t be beaten back into ploughshares after having been a sword….? That was stinkin’ FASCIST DELUSIONAL, not dumbed down. And the people who got rich off this decade of adventurism HAVE NO CULTURE. They’re sitting out there in “thar hills” with their loot just like in the movie “Deliverance”. Who are you kidding? Do you think that they’re going to build a CIVILIZATION with museums, schools, architecture, high art “factories”, places of worship, transportation, infrastructure, water security, etc etc etc.? Everyone who got rich off that war is a bona-fide cretin – “….squuueeeel like a pig, Annie…”. Their gene pool never had a lifeguard…
It is irresponsible and active malpractice on the part of everyone who is not dumbed down (drugged up) to keep on keeping on and kneeling before the Global War/Drug/Slave Lords….breaking every law of supply and demand in the book to “manage” their bloody and filthy fiat $$$$.
Yeah, bookkeeping is not the problem. Their “math” is working:
More misery for others = more $$$$ for ME ME ME.
I have no idea what this means from Anonioymouseikidu. If nuclear war would erupt because I’m NOT the only one who does not know what this person is talking about, then that’s a problem for all of us who have no clue, because I think they are in charge of something or other….some “ism”.
“….It’s always just war with you for some reason, damn cock suckin bloody butt bigots at their best until death do we bury at any cost, regardless of the consequences at hand., and the sooner the better too…..”
Who wants to believe that the world belongs in the hands of 480 people like the one who wrote that sentence? You’re going to eat the cost of protectionism for oil and opium more dearly than everyone else who was “poor” during your short-lived reign.
You are being judged by those who only get back on the big stage of life when agreement among you all has been reached that people are being forced to be stupider than their species experientially achieved a million years ago through evolution. Yeah, okay, I believe you, people are stupid. Calm down.
People may make it possible to be above the law, but no one escapes the judgement of others, do we? When the law gets down to being mercilessly in favor of pharisaism, an absolute authority, instead of the spirit of the law that your ancestors handed down to you as “rule of law”, then I’ll admit to being a bigot against those kind of “riches”. Considering the global environment of trade, no one wants that shit on their land. The next power zone on Planet Earth will have none of you. Go figure.
Just drumming up business for funeral directors and florists. Might as well be for a Just War to follow the Oil and Opium War. Pretentious, I know. but it’s got to be done or the ages that follow forget that they were ever more than where they find themselves today. That light does not go out anymore. “You shall not pass”.
Corrected sentence – complex bad of info – sorry:
You are being judged by those who only get back on the big stage of life when agreement among you all has been reached that people are being forced to be stupider than their species experientially achieved as true biological intelligence (the BRAIN) a million years ago through evolution. Yeah, okay, I believe you, people are stupid. Calm down.
HM banking for we dummys.
Advise to follow.
In the end bank with the biggest guns and shuckester.
Thanks for the help.
Pretty much what everyone else says.