Goldfinger. He’s the man, the man with the Midas touch. A spider’s touch. Such a cold finger, beckons you to enter his web of sin, but don’t go in. So goes the Shirley Bassey song that was the title track to the 1964 James Bond classic starring Sean Connery. In this movie, the evil bullion dealer, Auric Goldfinger attempts to place an atomic device in Fort Knox which would render the gold there useless for 58 years, increasing the value of Goldfinger’s own gold and giving the Chinese an advantage resulting from the ensuing economic chaos.
When Goldfinger was produced in 1964, the world used gold as a means for countries to fix their exchange rates. Under this system, the major trading nations all fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at approximately $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. Over time, persistent balance of payment deficits led President Nixon to end the convertibility of the dollar to gold resulting in the end of the “gold standard.”
Historically, gold and silver have been common forms of money due to their rarity, durability, divisibility, fungibility, and ease of identification. The gold standard protected citizens from hyperinflation and other abuses of monetary policy; however, the limited availability of “specie” money also was seen as a limit to economic growth since the requirement that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow without experiencing deflation. This can limit the desire to purchase goods and services on credit as deflation costs debtors at the expense of creditors. Since so much of the economy now requires the ability to invest for the long term this can be a problem.
During the Republican debates much of America has been exposed to the ideas of Representative Ron Paul, a staunch advocate of going back onto the gold standard. According to Congressman Paul, the United States runs a system of “fiat money” or money backed only by the fiat of the government declaring that it is money. Therefore, the dollar can be inflated or increased at the “push of a button at the say-so of a powerful person or organization.” This means that the Federal Reserve to create money out of thin air whenever they want to. Congressman Paul suggests that if the dollar were backed by gold and silver, people couldn’t just “sit in some fancy building and push a button to create new money.” He adds that inflation and fiat money are very seductive and beneficial to those at the top, and very dangerous to everyone else and the nation as a whole.
While Congressman Paul is correct in his concern about the manipulation of the nation’s money supply and the tendency for our “monetary elves” to create inflation, a move to the gold standard is probably not the best way to deal with the problem. Debasing the currency is a policy decision that can happen whether or not a country uses fiat money or specie currency. In fact, one of the reasons that the Roman Empire fell is that the currency was debased by the Emperors, who reduced the weight of coins over time.
Poor monetary policy is a problem that can happen no matter what form of currency a country uses. Quick political answers like moving to the gold standard are little more than panaceas when political leaders are unwilling – or incapable – of making real policy decisions.