December 2024

The Gilded Standard 

“Gold is money. Everything else is credit” J.P. Morgan 

For centuries, gold served as the foundation of Western economic systems due to its intrinsic value, scarcity, and role as a reliable store of wealth. The gold standard, formalized in the 19th century, ensured that every dollar issued was backed by a tangible reserve of the shiny metal. Tethering currency to gold created a stable, predictable financial system and imposed fiscal discipline on governments, restraining their ability to print money recklessly and maintaining the public’s trust in the value of their money. It was a model of accountability that limited the influence of policymakers on monetary systems, economic cycles, and national debt.

Gold played a pivotal role in trade and commerce, particularly in settling international accounts. In a pre-fiat currency era, nations used gold to balance trade surpluses and deficits. If a country imported more than it exported, it would need to settle the difference by transferring gold to its trade partners. This mechanism provided a natural check on trade imbalances and discouraged prolonged deficits, as nations sought to avoid depleting their gold reserves. The system ensured that trade operated within sustainable limits and aligned with the underlying economic realities of the participating nations.

In the early 20th century, this standard began to unravel, and its eventual abandonment in the 1930s can be traced to John Maynard Keynes’ seminal work, The General Theory of Employment, Money, and Interest. Keynes argued that governments could and should manipulate the economy through deficit spending, monetary expansion, and demand-side interventions. Interventionist/central planning theories gave policymakers the intellectual cover to decouple from the gold standard and embark on reckless fiscal experiments. Far from spurring economic growth, FDR’s New Deal, hailed by many as a bold economic strategy, was in reality a demand-side spending scheme marked by an unprecedented expansion of federal power. This included vast welfare programs and attempts to centralize economic control through interventionist policies (central planning) and government overreach.

Proponents of Keynesian economics claim the New Deal rescued the U.S. from the Great Depression. But if that were true, why did it take over a decade to emerge from the economic slump? The answer lies in the fact that the economy didn’t fully recover until the nation entered World War II, which reopened factories and employed millions to produce weapons and supplies. The gold standard’s restrictions were wrongly blamed by academics and bureaucrats alike, but its dismantling failed to deliver the promised results. Instead, it ushered in a new era of profligate spending that fundamentally changed the trajectory of both monetary and fiscal policy.

Under a gold-backed currency, policymakers faced natural constraints—they could only spend what their gold reserves allowed. A gold standard acts as a mechanism of accountability that serves to both curb inflation and foster monetary and fiscal stability. A fiat currency, on the other hand, allows profligate central bankers to print money at-will, severing fiscal policy from any tangible restraint. Advocates of fiat systems argue this flexibility improves economic growth and adaptability, but history paints a different picture. Fiat money enables rampant deficit spending, devalues currencies, and contributes to unchecked debt accumulation. Furthermore, Keynesian interventions distort market signals, misallocate capital, and mask the true costs of bad fiscal policies—at least temporarily.

Keynesians argue against a precious metal standard, claiming it limits their flexibility and hinders their ability to respond during a crisis. In truth, this limitation is a feature, not a bug. And for the record, everything is a crisis to bureaucrats.

While there is much to be said in support of a gold standard, it is not without flaws. A fiat currency can grow commensurately with the economy, whereas if output (goods and services) increases faster than a gold-backed money supply, the law of supply and demand dictates that prices will fall. In other words, deflation, which discourages capital investment, encourages delayed consumption, and increases the burden of debt repayment (both personal and national).

The cornerstone of Keynesian theory is the illusory multiplier effect—the claim that every dollar of government spending generates additional economic growth. In reality, the result has been closer to a fractionalization effect. For nearly a century, western governments have operated under the false premise that endless spending leads to prosperity. This has produced ballooning national debts, inflationary pressures, and economic inefficiencies, leaving us worse off than before.

Economic growth stems not from borrowing and spending, but from innovation and the resulting increase in productivity and output. The abandonment of the gold standard was not a leap toward efficiency or recovery but a surrender to expediency. Western leaders have spent decades chasing the illusion of wealth through reckless fiscal policies, only to burden future generations with unsustainable debt.

The gold standard represented discipline, restraint, and accountability—qualities sorely lacking in today’s monetary systems. Though a return to the gold standard may be unrealistic, the principles it embodies—stable monetary system, fiscal responsibility, and growth through efficient allocation of resources and innovation—remain vital. Absent an economic epiphany and subsequent course correction, the world will continue down a path of mounting debt and eventual economic collapse. It’s time for policymakers to recognize the abject failure of Keynesian economics and rediscover the wisdom of sound money.

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
wasatchfinance.com