Earlier this week Thomas Hoenig, president of the Kansas City Federal Reserve, went out of his way to call the gold standard a "very legitimate monetary system." In November, World Bank President Robert Zoellick and Indiana Republican Congressman Mike Pence both called for a serious look at using gold as the centerpiece of international monetary reform.
The fact that a Fed leader, the highest-ranking American official in international economics, and a potential presidential candidate are talking up the gold standard indicates that floating money is running out of political cover, and that the obstacles to gold replacing it are narrowing.
The first confirmation of this was the reaction of certain economic elites who, instead of responding with a straightforward defense of the status quo, lobbed ad hominem attacks on those who dared to mention gold. "I think [Zoellick] is living in the past," Edwin Truman of the Peterson Institute for International Economics told the Financial Times. Gold is "minor and really irrelevant," echoed Peterson Institute Director Fred Bergsten in the same article.
The most common practical objection to the international gold standard is political: that the slight deflationary bias it gives off would not be tolerated by people today. Yet this conclusion overlooks the serial price crashes that the economy has endured since gold was demonetized in 1971.
At different times and most recently all at once, the values of homes, stocks and other investment assets have collapsed and traumatized the lives of ordinary Americans. Think upheaval over monetary policy was a thing of the 19th century? In 1982 a mob of tractor-driving farmers blockaded the Fed headquarters in Washington in protest over high interest rates, leading Chairman Paul Volcker to hold public forums around the country to try and explain his prolonged and painful effort to squeeze inflation out of the economy.
The busts of the post-Bretton Woods era have been the downsides of the bubbles. Taken together they represent the chronic problem of modern capitalism: the excess credit that at its high point decouples capitalist virtues from prosperity and at its low point pins ordinary people under acute economic distress. This is the distinguishing feature of the debt-based monetary system the world inherited by going off gold.
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