The case for gold (part one)
Over the last 30 years, we have witnessed runaway inflation, a variety of speculative bubbles and a succession of currency crises. Is there no way to escape this mayhem, which spreads its misery from the day-labourers of Buenos Aires to the pensioners of New York? In fact, one solution offers itself; an idea so unpopular that only a handful of cranks nowadays even dare consider it. In order to rid the global economy of its chronic instability, we must return to our golden fetters.
In an introduction to a recently-published collection of historic writings on gold (The Case for Gold, three volumes, Pickering & Chatto), William Rees-Mogg lays out the case. Of all the currencies invented by man, according to Rees-Mogg, only gold is stable over the long run. Since Britain adopted a fiat currency in 1931, sterling has lost more than 98 per cent of its value. Gold, on the other hand, has retained its value: an acre of English agricultural land cost ten ounces of gold in 1800 and roughly the same amount 200 years later.
Rees-Mogg argues that a paper currency, prone to inflation and freely floating on the foreign exchanges, does not meet two of the classical requirements of money; that it should be both a standard and a store of value. Take away the stability of gold, he says, and long-term contracts become too risky. This argument overlooks the development of derivatives over the past quarter of a century, which can be used to hedge most financial risks and whose expansion is directly related to the collapse of the Bretton Woods currency system in the early 1970s. Yet contained in this collection is a more powerful critique of paper currencies. Economists of the Austrian school-such as Ludwig von Mises and Murray Rothbard-argue that the interest rate in a free market should be determined by the forces of supply and demand, rather than by the diktat of central bankers. A gold-backed currency, they claim, provides a self-equilibrating mechanism, balancing both the demand for investment with the supply of savings, and the demand for imports with the supply of exports.
According to the Austrian economists, paper currencies suffer from the inability of central bankers to determine the correct interest rate. In order to please their political masters, central bankers tend to set the rate of interest too low. This may…