Gold shaped our country’s monetary policy—and Americans’ fantasies of wealth—for nearly four centuries. James Grant reviews One Nation Under Gold by James Ledbetter.
It’s no work at all to make modern money. Since the start of the 2008 financial crisis, the world’s central bankers have materialized the equivalent of $12.25 trillion. Just tap, tap, tap on a computer keypad.
One Nation Under Gold is a brief against the kind of money you have to dig out of the ground. And you do have to dig. The value of all the gold that’s ever been mined (and which mostly still exists in the form of baubles, coins and ingots), according to the World Gold Council, is a mere $7.4 trillion.
Gold anchored the various metallic monetary systems that existed from the 18th century to 1971. They were imperfect, all right, just as James Ledbetter bends over backward to demonstrate. The question is whether the gold standard was any more imperfect than the system in place today.
Republican William McKinley, who campaigned for ‘sound money,’ signed the gold standard into law in 1900.
That system features monetary oversight by former university economics faculty—the Ph.D. standard, let’s call it. The ex-professors buy bonds with money they whistle into existence (“quantitative easing”), tinker with interest rates, and give speeches about their intentions to buy bonds and tinker with interest rates (“forward guidance”).
You wonder how the Ph.D. standard came to eclipse a system whose very name, “gold standard,” is a byword for excellence. Addressing a national television audience on Sunday evening, Aug. 15, 1971, President Richard Nixon announced the temporary suspension of the dollar’s convertibility into gold. No more would foreign governments enjoy the right to trade in their greenbacks for bullion at the then standard rate of $35 to the ounce. (Americans had long since relinquished that right; indeed, as Nixon spoke, they could not legally own gold.) Roughly a half-century later, the temporary suspension is beginning to look permanent.
Up until the Nixon edict, paper money, under the law, was a kind of derivative. It derived its value from the metal into which it was convertible. Today’s dollar is inconvertible. To be sure, you can exchange Federal Reserve notes for gold coins or bitcoins to your heart’s desire, but the rate of exchange is whatever the market will bear. Under a gold standard, fixedness was the great monetary virtue. Nowadays, adaptability is the beau ideal. As George Gilder observes, money has been transformed from a measuring rod into a magic wand. Anyway, the Hamiltons or Lincolns or Grants in your wallet owe their value to the government’s fiat, not to its gold.
Mr. Ledbetter’s book is a chronicle of the American people’s fascination with gold. He is mystified and bemused by it. He rolls his eyes at the gold rushes and the gold-centered orthodoxies of yesteryear. Whatever were our forebears thinking?
His well-spun narrative spans the better part of four centuries. He takes us from gold mining in North Carolina during the administration of John Adams to the Founders’ monetary protocols, which defined the dollar as a weight of gold or silver; from the California Gold Rush to the late-19th-century politics of inflation, featuring William Jennings Bryan and his unsuccessful campaign to inflate the gold dollar by substituting abundant silver; from the formation of the Federal Reserve in 1913—the dollar was still as good as gold—to the shockingly improvisational dollar policies of the New Deal. One fine day, Mr. Ledbetter relates, FDR raised the gold price by 21 cents because it seemed to the president that three times seven was a lucky number.
Next comes the patchwork gold regime of the 1950s and 1960s, the system known by the place at which it was conceived, Bretton Woods (N.H.). No more was gold the gyroscope, or flywheel, of the international monetary system, as Lewis E. Lehrman has written. Now the metal sat inert in vaults. Central banks might demand the right to convert their dollars into gold, and vice versa, but few exercised the option.
Mr. Ledbetter breaks some historical news by uncovering the existence of Operation Goldfinger, a secret government project in the time of Lyndon Johnson to extract gold from “seawater, meteorites, even plants.” By the late 1960s, America’s foreign liabilities were growing much faster than the gold available to satisfy them. For better or worse, the run on finite American gold continued, and Nixon cut the cord.
On, now, to the great inflation of the 1970s, along with the rise of the goldbugs, the cranks (Mr. Ledbetter’s interpretation) or visionaries (as others might style them) who predicted the collapse of the dollar and the rise of double-digit inflation in the Jimmy Carter years. In the mid-1970s, as Mr. Ledbetter recounts, the long fight to restore the right of American citizens to own gold—a right that FDR’s administration had extinguished in 1933—was finally won. The author concludes his story with a survey of the contemporary rear-guard movement to expose the failings of today’s monetary nostrums and reinstitute a gold dollar.
As if to clinch the case against gold—and, necessarily, the case for the modern-day status quo—Mr. Ledbetter writes: “Of forty economists teaching at America’s most prestigious universities—including many who’ve advised or worked in Republican administrations—exactly zero responded favorably to a gold-standard question asked in 2012.” Perhaps so, but “zero” or thereabouts likewise describes the number of established economists who in 2005, ’06 and ’07 anticipated the coming of the biggest financial event of their professional lives. The economists mean no harm. But if, in unison, they arrive at the conclusion that tomorrow is Monday, a prudent person would check the calendar.
Mr. Ledbetter makes a great deal of today’s gold-standard advocates, more, I think, than those lonely idealists would claim for themselves (or ourselves, as I am one of them). The price of gold peaked as long ago as 2011 (at $1,900, versus $1,250 today), while so-called crypto-currencies like bitcoin have emerged as the favorite alternative to government-issued money. It’s not so obvious that, as Mr. Ledbetter puts it, “we cannot get enough of the metal.” On the contrary, to judge by ultra-low interest rates and sky-high stock prices, we cannot—for now—get enough of our celebrity central bankers.
What was the gold standard, exactly—this thing that the professors dismiss so airily today? A self-respecting member of the community of gold-standard nations defined its money as a weight of bullion. It allowed gold to enter and leave the country freely. It exchanged bank notes to gold, and vice versa, at a fixed and inviolable rate. The people, not the authorities, decided which form of money was best.
The gold standard was a hard task master, all right. You couldn’t devalue your way out of trouble. You couldn’t run up a big domestic budget deficit. The central bank of a gold-standard country (if there was a central bank) was charged with preserving the convertibility of the currency and, in a pinch, serving as lender of last resort to needy commercial banks. Growth, employment and price stability took their own course. And if, in a financial panic or a business-cycle downturn, gold fled the country, it was the duty of the central bank to establish a rate of interest that called the metal home. In the throes of a crisis, interest rates would likely go up, not down.
The modern sensibility quakes at the rigor of such a system. Our forebears embraced it. Countries observed the gold standard because it was progressive, effective, civilized. It anchored prices over the long term (with many a bump in the short term). It promoted balance in international accounts and discipline in domestic ones. Great thinkers— Adam Smith, David Ricardo and, yes, John Maynard Keynes himself in the wake of World War I—extolled it.
The chronic problem in gold-standard days was the one that continues to bedevil us moderns: how to maintain a stable currency when lenders and borrowers run amok. President James Buchanan, Lincoln’s immediate predecessor, addressed the question in his first State of the Union address in the wake of the Panic of 1857. The story of American finance, he contended, was the story of paper credit subverting sound money: “At successive intervals the best and most enterprising men have been tempted to their ruin by excessive bank loans of mere paper credit.” A not-so-distinguished president, Buchanan made the monetary point that Mr. Ledbetter skirts: Excessive lending and borrowing subverts the stability of money. It’s the cause of panics under monetary systems both metallic and paper. Which is to say that we earthlings will never achieve financial perfection. It seems that the trouble (or, at least, one trouble) with money is credit and that the trouble with credit is people.
The gold standard, perhaps above all, was a political institution. It flourished in the age of classical liberalism. It was the financial counterpart to the philosophy of limited government. The Ph.D. standard is likewise a political institution. It is the financial counterpart to the philosophy of statism. The policy that some banks are too big to fail—that they must be treated almost as wards of the state to prevent their failure—is a hallmark of the modern age. The policy—indeed, the law—that the stockholders of a bank are themselves responsible for the solvency of the institution in which they hold a fractional interest was a hallmark of the gold-standard era.
Mr. Ledbetter is on a mission to set the historical record straight and head off an unprogressive movement away from paper money. He writes: “To avoid gold’s false paths, we need to argue with the past, to test the assumptions that are too often and too casually passed uncritically.”
I expect that before very long we will be arguing with our immediate past—demanding to know why the public debt has doubled since 2007, second-guessing our collective belief in the mazy doctrines of “quantitative easing” and “forward guidance,” and tuning in to watch congressional hearings into the causes of some future stock-market crash. Mr. Ledbetter has told some good stories. He hasn’t made his case.
—Mr. Grant is the editor of Grant’s Interest Rate Observer.