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)