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article imageOp-Ed: Cross of Gold, Some thoughts on the Gold Standard

By John Rickman     Nov 20, 2007 in Politics
In recent years there has been a clamor in some sectors for a return to the gold standard. This topic has taken on new urgency owing to the presidential campaign of Representative Ron Paul (R-TX) self styled "populist" and gold advocate.
More than a hundred years ago a true Populist, gold opponent and Presidential candidate, William Jennings Bryan, gave a speech entitled "The Cross of Gold."
"If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."
The effect of William Jennings Bryan's famous "Cross of Gold" speech upon his listeners when he delivered it on July 9, 1896, at the Democratic National Convention in Chicago was electrifying. The speech became almost overnight the single most famous political speech in American history and confirmed Bryan as one of the most popular speakers in American history.
Lawyer, statesman, politician, and evangelical Bryan is remembered today as the lawyer for the prosecution in the famous Dayton "Monkey Trial," which he won. But his real claim to fame in American History is as an outstanding proponent of Populism, peace, anti-imperialism, trust-busting and "Free Silver."
It was in defense of "Free Silver" that Bryan made the "Cross of Gold" speech and to understand its importance then, and to the political debate of today, we must first understand what money is. Money is any article or substance used as a medium of exchange, measure of wealth, or means of payment, whether that be gold, silver, paper money, wampum, cowrie shells or anything else that people will accept in exchange for goods and services.
To the naive, gold seems like an obvious form of currency. After all gold has a "real" value, it can still be exchanged for goods and services long after a government that has issued paper money has disappeared. This was a very real argument for those Americans who had seen their life savings wiped out because it was held in the form of Confederate currency.
The problem with this argument is that many other things have "real" value as well, things like silver, platinum, jewels, bread, canned food, ammunition and water. But the real quandary comes with fixing the exchange rate. Just how many bricks of gold is one glass of water worth if you are dying of thirst in the desert? How many bricks of gold is one bullet worth in a broken down culture without law and order if you are out of ammunition and your neighbor is not?
The gold standard is beloved of objectivists, libertarians, anarchist, survivalists and other fans of the "law of the jungle." It is also supported by believers in an impending "rapture" who are not completely confident that they are on the "A" list.
Opponents include virtually all economists with the exception of the fringe "Austrian school of economics." and a few die hard "supply-siders," proponents of what Bush senior dubbed "Voodoo economics."
The objections to a gold standard are many and weighty. For one thing gold is deflationary. Gold is finite, there is only so much of it on Earth so the supply of money which is based on gold is also finite but the ability of the economy to produce goods and services is, if not infinite, then at least easily capable of outrunning the supply of money. With less money in the economy than the value of the goods and services the value of the money increases or "deflates."
The problem with deflation, if you are a creditor, and most working class Americans are, is that if the value of the money goes up then the amount of your debt goes with it.
If you borrow $100, and then the value of the money doubles, you will still have to repay the $100 (plus interest) but money you repay it in will be worth more than the money you borrowed. This therefore represents a larger amount of your goods or services that you must part with in order to get it.
Creditors, of course love this, which is why Bryan, a champion of the people, was so ardent in favor of a currency that allowed for an expansion of the money supply to match the expansion in the supply of goods and services, such as using both silver and gold.
Even former proponents of gold, such as Alan Greenspan, have switched to a support for "Fiat currency" which is money backed by the government and based on the total of goods and services in the economy. The way this money is "anchored" that is has its value fixed is that the government agrees to except its own currency in payment for the taxes it is owed.
That means that at least one "client" has agreed to accept the currency in payment and since everyone pays taxes (except perhaps the rich) this means that one person will accept the currency from another knowing that they can exchange it for a valuable commodity, paid taxes. This also prevents the government from printing too much money, more than the supply of goods and services warrants, since this will inflate the currency and therefore short change them come tax time.
When Greenspan debated Congressman Ron Paul on the advantages of Fiat money as compared to gold he pointed out, quite correctly, that the fiat money has retained all the advantages of a gold based currency because the central bankers have responded to it exactly as though a gold standard were still in place. Fiat money has all the advantages of gold and none of the drawbacks.
And the drawbacks should be obvious with only a little reflection. None but the most wild eyed fanatic, or Ron Paul supporters, would actually propose using real gold coins. The prospect of hauling around several pounds of metal for even simple purchases is seen in the modern world familiar with paper money, credit cards, on line banking and Paypal to be utterly absurd.
Another drawback of gold coins is that they are subject to a vast array of methods whereby they can be adulterated. Some of the oldest cuneiform tablets known to man, from the archives of ancient Babylon, speak of what we call today "sweating," where coins are placed in a leather sack and the children of the poor are paid nominal sums to stand and shake the bags all day.
At the end of the day a tidy profit in gold dust is found in the bag and the coins remain almost unchanged, except for a little "normal wear and tear." If a person had a large enough number of coins and a cheap way of shaking them, say a paint mixer, he could live off the profit of this one scam alone and there are literally dozens of others, including melting the coins down and mixing base metals in with the gold and then recasting them. Do we really want the merchant to have to haul out a set of balance scales every time we buy a loaf of bread? Do you really want to have to bite every coin you are given to make sure it is not counterfeit?
So instead of coins we have paper that can, in theory, be "redeemed" for gold but that then depletes the money supply as the coins are lost, destroyed or melted down for other uses, such as jewelry or the gold plating electrical contacts of your computer. This puts industry into competition with the monetary system since manufacturers have better things to do with gold than simply let it sit idle in a vault.
In the end we are driven back to paper, or electrical signals on the bank's computer, because nothing else will allow commence to get on with the business of business.
When William Jennings Bryan made his famous "Cross of Gold" speech more than a hundred years ago he was fighting a very real battle upon whose outcome very real consequences hung, but history has judged that debate long ago. It has sided with the people against the "idle holders of idle capital" and come down "upon the side of the struggling masses." Today the topic of a gold standard is only of interest to historians, and a small cadre of cranks and fanatics.
More about Gold standard, Ron paul, Monetary policy
 
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