Progress pill
The Rise of the Welfare State in the 20th Century

Abandoning the Gold Standard

A Philosophical History of Freedom

Abandoning the Gold Standard

  • Gold as the Global Standard
  • The "Nixon Shock"
  • A monetary market without a State monopoly is possible
Money is a tool that has enabled humans to move beyond barter, save, and coordinate on a large scale through the market. It has made possible the specialization of labor, comparative advantage, gains from trade, and economic calculation. Without money, there would be no modern civilization.

Gold as the Global Standard

And it turns out that a particular form of money gradually distinguished itself from others to become, over the centuries, the global standard of reference, which is gold.
Indeed, gold is a hard currency, difficult to produce, costly to counterfeit. The market has chosen gold as the most reliable, most durable, and least manipulable currency. Historical evidence suggests that when individuals have the option to choose their currency, they tend to opt for gold.
This is why, in Human Action, Ludwig von Mises writes:
The gold standard was the world standard of the capitalist era, of increasing prosperity, freedom, and democracy […] It was the international standard that international trade and the world capital markets needed […] It carried industry, capital, and Western civilization to the most remote corners of the planet, creating wealth previously unknown. But the gold standard constrains governments to fund their expenses through taxes rather than inflation, which explains a certain hostility from political and economic elites towards this system. Because linking a currency to a precious metal limits the central bank's ability to finance the growth of the welfare state through indirect taxation, which can lead to inflation. That's why, as early as 1923, Keynes declared:
In truth, the gold standard is already a barbarous relic. (...) The defenders of the old standard do not notice how far it is now removed from the spirit and needs of the new times. (J.M. Keynes, Monetary Reform).

The "Nixon Shock"

The Bretton Woods system, designed in 1944 and fully implemented in 1959, was based on both gold and the dollar, the only currency convertible into gold. Therefore, it was necessary to accumulate dollars to obtain gold.
At that time, with the Vietnam War in particular, the increase in the U.S. government deficits led many foreign countries, including France, to want to convert their dollars into gold at the FED. On August 15, 1971, President Nixon decided to cancel the promise of dollar convertibility into gold, thus creating the first entirely paper currency in the history of the United States. From this day can be dated the moment when money completely came under the control of central banks. In an interview, Richard Nixon is said to have stated:
We are all Keynesians today.
Indeed, for many Keynesian economists, the abandonment of the gold standard gave governments the flexibility needed to respond to or prevent economic crises.
According to Alan Greenspan, former chairman of the Federal Reserve, the American central bank, the gold standard is incompatible with state debt and the financing of the welfare state:
I have always harbored nostalgia for the price stability inherent in the gold standard; a stable currency was its primary goal. However, I have long since conceded that the gold standard does not easily accommodate the prevailing view of a government's function, particularly its duty to ensure a social security system. […] Most Americans have tolerated inflation as the price to pay for having a modern welfare state. There are no longer any proponents of the gold standard, and I see little possibility of its return. (The Age of Turbulence). On the contrary, for people like Jacques Rueff, abandoning precious metal is a mistake that can only lead to a continuous decrease in purchasing power, accompanied by a reduction in living standards, an increase in income inequality, and growing economic instability.
In February 1965, during a televised press conference, General de Gaulle, inspired directly by Rueff, proposed a return to the gold standard. He stated:
Gold, which does not change its nature, which has no nationality, which is held, eternally and universally, as the unalterable value par excellence.

A monetary market without a State monopoly is possible

In 1976, Hayek proposed an alternative to the State's monopoly on currency creation: competition between currencies. In his book, Pour une vraie concurrence des monnaies (The Denationalization of Money), he envisioned a monetary market without a State monopoly in which several private currencies would coexist. The creation and management of different currencies by private entities would allow individuals to choose the most stable and reliable currency, thus encouraging competition and discipline among issuers.
He writes:
As long as we have not restored a situation in which governments (as well as other public authorities) know that if they spend too much they will be, like anyone else, unable to meet their obligations, there will be no pause in this process which, by substituting collective activity for private activity, threatens to stifle individual initiative. Under the current unlimited democracy, in which the government has the power to confer special material benefits to particular groups, it is compelled to buy the support of enough of them to constitute a majority. (Ch. XXI, The effects of finance and public spending).
For Hayek, the past instability of the market economy stems from the fact that the most important regulator of market mechanisms, namely money, cannot itself be the product of a market process.
Hayek believed that a free market of private currencies would lead to greater monetary stability. Nearly 50 years later, a cryptocurrency like Bitcoin embodies Hayek's competitive vision by offering a decentralized alternative to the monopolistic system of central banks. Bitcoin, with its fixed emission limit of 21 million units, serves as a safeguard against inflation and the arbitrariness of regulators.
Quiz
Quiz1/5
According to Keynes, what is the main problem with the gold standard?