In a recent article titled ‘Gold Standard supporters are lunatics and hacks: Nouriel Roubini’ – reading time 2 minutes – Roubini is reported as having said in an interview:

• first, “one of the major causes of the Great Depression was the existence of the gold standard”.
  My comment:  I can only assume that what Roubini believes is that if the gold standard had not existed prior to and during the early 1930’s Great Depression that the Governments of the day might have been able to evoke fiscal measures that may have either resulted in the Great Depression not occurring, or not being as ’Great’ as it turned out to be.  If that is what he means by his use of the word ‘causes’ I consider that nothing but speculation on his part.  I also believe that if the gold price had not been pegged at U.S.$35/ounce from 1944 through to President Nixon’s renouncement of the Bretton Woods agreement in August, 1971, the developed world would have found itself in its present over-levered fiat currency state long before now; and,

• second, “they (I assume he means those who legislated the gold standard prior to the Great Depression) restrained the ability of the Central Banks to provide lender-of-last-resort support to their banks, created tight money – it created bank runs and eventually led to the Great Depression”.

  My comment: as I understand it, the principal purpose of a gold standard is to preclude a government from manipulating or restricting private commerce within its geography as easily as it can do those things under a fiat currency regime (i.e. a government must broadly ‘live within its means’ under a gold standard).  In theory, a gold standard protects a given geography (read country) against hyperinflation and other monetary policy abuses, and is a disabler of government deficit financing.  So, on this point I think Roubini is correct in what he is quoted as having said.

Unless Wikipedia and I have it wrong, a history of forms of a gold standard shortly before and after 1924 can be briefly summarized as follows:

• what was referred to as a gold specie standard ended but was not repealed in the United Kingdom and the rest of the British Empire at the outbreak of World War I when Treasury notes replaced gold sovereigns. In 1925 Britain returned to a gold standard in conjunction with Australia and South Africa.  That officially ended the gold specie standard, and was itself repealed in 1931;

• in 1944 the Bretton Woods Agreement established the International Monetary Fund and an international monetary system based on adoption of the U.S.$ as the World Reserve Currency, in combination with what is described as a ‘gold exchange standard’.  Pursuant to this system, national currencies other than the U.S.$ were convertible into U.S. dollars that were in turn convertible into gold at a fixed price of U.S.$35 per ounce;

• on August 15, 1971 U.S. President Nixon ended the direct convertibility of the U.S.$ to physical gold, thereby effectively ending the ‘gold exchange standard’ component of the Bretton Woods Agreement.  After August 15, 1971 the physical gold price expressed in U.S.$ was set by in the open market, as it continues to be today.

For a more extensive and detailed history of the use of physical gold as what I think of as a ‘barter standard’, see ‘Gold Standard’ as summarized by Wikipedia.

So are current gold standard supporters ‘lunatics and hacks’ as Roubini apparently has suggested?  I think the answer to that question is ‘yes’, if ‘lunatics and hacks’ are defined as people who today like Don Quixote, are tilting at windmills.  If Roubini is defining ‘lunatics and hacks’ as people who are mentally ill, dangerous, foolish, or unpredictable, or who generate dull, unimaginative, and trite work, then I think the answer to that question is ‘no’ – unless ‘trite’ can be taken to mean ‘impractical’, which I don’t think it can.

Are those who advocate a return to a gold standard impractical?  I think they are.  I think that because I think to return to a gold standard would require a re-distribution of wealth that would only happen following what I think would have to be enormous societal disruption.  Essentially, I think all the monopoly money would have to come off the table, Luddites* would have to be enlisted to destroy all the paper money printing presses, and a new monopoly game would have to begin will all players restarted on a level playing field.  I think there is a very, very low likelihood of such a thing happening.

All that said, I think Nouriel Roubini seriously overreached when he used the words ‘lunatics’ and ‘hacks’.  I also think that all those who advocate a return to a gold standard, impractical as I think they are, ought to simply on this occasion write Roubini’s comments off and move on.

None of this means I won’t continue to read and think about what Roubini says, because I think more often than not Nouriel Roubini is well worth listening to.

* Note: Luddites were a social movement of 19th-century English textile artisans who protested – often by destroying mechanized looms – against the changes produced by the Industrial Revolution, which they felt were leaving them without work and changing their way of life (Wikipedia).  Sound familiar?

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