Contrary to what MMT people say, a “gold standard” does not (and cannot) physically limit a government’s ability to create its own currency. A “gold standard” is a pretense, a political ploy, a gimmick. It is simply a variant of the Big Lie, as we shall see below.
The image above shows 4,600 tons of gold in an underground vault in London.
Who decides whether this gold is worth one cent, or worth £156 billion? (USD $223.4 billion)
We humans decide. Not eels, elephants, or extraterrestrials. We humans decide the monetary value of gold. We humans also invent things like “gold standards,” and we change our inventions as we deem fit.
A “gold standard” is a mental construct, like money itself. Therefore, logically, how could a “gold standard” physically limit our ability to create dollars, which are abstract non-physical units of account? The only limit is what we humans mentally decide — and we change our decisions constantly.
The image below is absurd, but it is the kind of absurdity that most people indulge in (including MMT people). Why not just change the “gold standard”? (Actually governments did change it.)
MMT people falsely claim that the gold standard limited the U.S. government’s ability to create dollars, as though this limit was beyond human control.
Rodger agrees with them, saying…
“Deciding to be on a gold standard, where each unit of a nation’s sovereign currency must be matched by a unit of gold, cancels the nation’s unlimited ability to create its money. During much of our history, the U.S. government has been on some sort of metal standard, and at those times, we were not Monetarily Sovereign. Our government needed to ask our citizens or foreigners for dollars.”
I don’t agree. Since when has the U.S. government been dependent on citizens or foreigners for dollars?
In the video below, at the 04:45 mark, MMT advocate Bill Mitchell agrees with his guest who says: “The gold standard limited the stock of money we had.”
MMT advocate Warren Mosler likewise doesn’t get it. In the video below at the 32:00 mark, Mosler says, “During the gold standard days if the government spent and didn’t tax, it could run out of gold and money.”
I SAY THAT ALL THESE PEOPLE ARE WRONG.
(That bald guy on the left is even more wrong. I watched the entire video, and he says nothing that makes any sense.)
I claim that the “gold standard” was always a pretense; a gimmick; a previous version of the Big Lie, and that it never imposed any physical limits on the number of dollars the U.S. government could create. I say the “gold standard” gimmick was as arbitrary and political as is the “debt ceiling” gimmick of the U.S. Congress today. The “gold standard” gimmick came and went as needed, just like the “debt ceiling” gimmick.
When politicians did not want to spend federal dollars on some project or program, politicians referred to the “gold standard” in order to falsely claim that the U.S. government was “broke.” But lo! When politicians wanted to create limitless dollars for both World Wars, the “gold standard” became irrelevant. (It was magical!) Oh, people fretted about it, and wrung their hands, crying that the world would end, but people do the same thing with today’s “debt ceiling” charade. It’s all politics. As our British cousins say, “Stuff and nonsense.”
Today’s politicians simply say the government is “broke,” period. (Therefore we must privatize Medicare and Social Security.) But lo! When politicians want to create limitless dollars for endless wars, the U.S. government’s “bankruptcy” becomes irrelevant.
Now consider this…
Gold is solid and physical, whereas dollars only exist in the human mind. The numbers in bank accounts are not dollars. The numbers only represent dollars, just as the lights on a scoreboard represent points. (Points only exist in the human mind).
Dollars are abstract units of account. The connection between mental dollars and physical gold is likewise abstract and mental, and can be changed or adjusted to mentally correspond to any quantity or scarcity of gold, or of any other physical thing.
If we decide that one dollar represents an ounce of gold, and we want to create more dollars, then we can decide that ten dollars represents an ounce of gold, or a hundred dollars represents it, or a thousand dollars, or whatever. Such changes actually happened in U.S. history. As Randy Wray has noted, countries routinely went on an off their gold standards at will. (However Wray also claims that the “gold standard” imposed limits on the amount of money the U.S. government could create. This is one of Wray’s many contradictions that he fails to resolve in his book Modern Monetary Theory, which I have right here in front of me.)
Furthermore, consider this…
At any point in time, whether or not there is a “gold standard,” the trading price of gold in dollars (or whatever currency) is subject to the gold trading market. How can a Monetarily Sovereign government base its fiscal policy on a volatile trading market? It can’t. It’s absurd.
For this reason, nations adopted and discarded the “gold standard” at will. When their central governments wanted to pretend that they were “broke,” they adopted the “gold standard” pretense. When governments wanted to create more money, they suspended the pretense. Randy Wray confirms this in his book.
Moreover, even when coins had precious metal in them, the coins were simply units of account printed on metal, rather than on paper. Coins usually circulated at fiat values far above their market value as metal. Their nominal fiat value was determined by the Sovereign, irrespective of any “gold standard.” (Hence the term “nominalism.”)
Here again the “gold standard” placed no physical limit on the government’s ability to create money. It was just a pretense.
Initially the “gold standard” illusion was necessary to make people give their “full faith and credit” to U.S. Treasury-issued currency. Most people have always tended to (falsely) think that a fiat currency is not valid unless it is “backed” by some precious metal. (In reality, all currencies are only backed by people’s “full faith and credit.”)
In 1862, Samuel B. Chase (President Lincoln’s Treasury Secretary) commissioned the issuance of “greenback dollars” (i.e. Treasury notes) for the U.S. Civil War. This was the U.S. government’s first modern paper currency. Chase designed their graphic imagery himself, putting his own image on the dollar notes, plus the words “In God we trust,” so that religious trappings would enhance people’s “full faith and credit.”
Many people ridiculed Chase’s “greenbacks,” saying that “greenbacks” were worthless because they were created out of “thin air.” (In reality all money is created out of thin air.)
Despite this, the “greenbacks” became accepted, since everyone was caught up in a frenzy of wartime activity, and everyone needed a medium of exchange. However, by the end of the Civil War, there was so much counterfeiting of “greenbacks” that the U.S. Secret Service was formed (in 1865) to police the counterfeiters.
After the Civil War, the U.S. Secret Service was not able to convince everyone to give his “full faith and credit” to “greenbacks.” Therefore in 1878 the U.S. Treasury started issuing “silver certificates” (in addition to greenbacks) that were “backed” by silver bullion. Below is an 1878 version.
Until 1923 these were “triple-signed” by the Treasury Secretary, Assistant Treasury Secretary, and Register of the Treasury, in order to make the certificates seem more legitimate. (The operative word there is “seem.”)
(The now-defunct office of “Register of the Treasury” corresponded to today’s head of the Bureau of the Fiscal Service.)
The graphic design of “silver certificates” frequently changed over time. You can see many of them here.
The U.S. government issued “silver certificates” from 1878 to 1964. The above “silver certificate” from 1957 says that if a person presented this bill to any Treasury-authorized bank, then the bank had to exchange it for one dollar’s worth of silver on demand. But how much silver was that? An ounce? A pound? A ton? At that time, one dollar’s worth of silver was whatever the trading markets decided, plus whatever the U.S. government decided.
So once again, despite silver certificates being “backed by silver,” there was no physical limit to how many silver certificates could be printed.
TRIVIA: The 1957 version had the signature of Robert Bernard Anderson (U.S. Treasury Secretary) plus Ivy Baker Priest (Treasurer of the United States). The latter person is in charge of the U.S. Mint and the U.S. Bureau of Printing and Engraving. These same two signatures appear on Federal Reserve Notes. Today, a hundred-dollar bill bears the signature of Jacob Lew (U.S. Treasury Secretary) plus Rosa Gumataotao Rios (Treasurer of the United States).
Tea Party morons might be shocked to know that one of the signatures on every U.S. currency note is that of a Mexican!
In 1882 the U.S. Treasury started issuing “gold certificates” that were supposedly convertible to gold coins, although the aggregate face value of “gold certificates” was much higher than the available number of gold coins.
So, once again the “gold standard” placed no physical limit on the government’s ability to create money.
Some “gold certificates” were “allocated,” meaning they supposedly corresponded to a numbered gold bar hidden in a bank vault somewhere. This too was an illusion, but it was necessary to convince people to give their faith to the “gold certificates.”
By the early 1900s the U.S. “greenback” dollar was accepted by all Americans. In 1933 the U.S. Treasury stopped issuing “gold certificates” (and in 1964 stopped issuing silver certificates).
Since all Americans gave their full faith and credit to the U.S. dollar, the purpose of the “gold standard” gimmick changed. In the 1900s, politicians started using the “gold standard” to falsely claim that “We can’t spend money we don’t have.” Voila: the Big Lie was born, and it persisted through World War II, despite the U.S. government creating vast numbers of dollars for the war.
The Big Lie persists today, despite there being no “gold standard” gimmick.
All fiat currencies are backed only by people’s “full faith and credit” — i.e. people’s willingness to use the currencies and regard them as valid. Sometimes the maintenance of this credibility requires illusions such as a “gold standard.” Sometimes the maintenance requires force, as when authorities shut down counterfeiters. Usually the maintenance requires a combination of illusion and force.
After WW II the victorious Allies set up the Bretton Woods system, in which one ounce of gold was worth 25 U.S. dollars. By 1971 it was 35 dollars.
But by the 1960s, the system was causing problems, since the number of dollars held by foreign countries outpaced the amount of gold the U.S. had on hand.
So, once again the “gold standard” placed no physical limits on the government’s ability to create money.
By 1971 an ounce of gold was said to be worth 35 dollars. Following a secret meeting at Camp David with his top advisers, President Richard Nixon announced on 15 Aug 1971 that the U.S. government would drop the “gold standard” gimmick. This surprised many people who had grown up with the gimmick. Many people said the dollar would plummet in value. Foreign leaders abandoned their summer vacations to address the (fake) “crisis.”
Quickly, however, the rest of the world likewise dropped the “gold standard” gimmick – thereby proving once again that gold never imposed any physical limit on the creation of money. From the start, the “gold standard” was a political decision. A lie. A gimmick.
Since that time, the gimmick has not been necessary, since the public has been fully conditioned to believe the Big Lie (“The U.S. government can’t spend money it doesn’t have”).
However the MMT folks never caught on.
(Never let “Chunch” make a sign for you. Look at how the word “grateful” is spelled.)