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It’s hard to fathom now given the debased nature of the monetary discussion today, but when Ronald Reagan ran for president in 1980, a standard line in his speeches was that “No nation in history has survived fiat money, money that did not have precious metal backing.” Translated for those who need it, Reagan was calling for a dollar defined in terms of the most stable commodity the world has ever known: gold.
And before readers who lean Democrat dismiss the above outright, please keep in mind that Reagan was campaigning on the revival of a monetary arrangement that no less than John F. Kennedy had spoken so forcefully in favor of when he was president. In Kennedy’s words, “This nation will maintain the dollar as good as gold at $35 an ounce, the foundation stone of the free world’s trade and payments system.”
Kennedy and Reagan, a Democrat and a Republican, both innately understood money in the way that Adam Smith did. As Smith put it in The Wealth of Nations, “the sole use of money is to circulate consumable goods.” Money isn’t wealth as much as it’s an agreement about value that facilitates the exchange of wealth. When we buy and sell we’re exchanging the fruits of our labor with others doing the same, which means good, trusted money that holds its value throughout time is what makes it possible for workers to attain equal value for their hard work.
Put rather plainly, money is the logical consequence of production. When we get up to go to work, we do so with an eye on getting. Think about it. Our work is what enables us to feed, clothe, and shelter ourselves. Money is yet again the agreement about value that producers accept for their toil, and since it’s broadly accepted, it can be exchanged for products and services. Good, trusted money also means that we can save some of the monetary rewards of our work with the future in mind.
All of this rates discussion now with inflation so very much in the news. The sad thing is that to watch the news, or read most any economic pundit, the wrongheaded view today is that inflation is a consequence of too much economic growth. The tragic corollary to a misunderstanding of inflation’s causes is that the only answer to inflation is putting people out of work. Nothing could be further from the truth. Economic growth is the logical result of investment, and investment is all about producing more and more goods and services at lower and lower prices. The experts are wrong. Falling prices are a sign of a soaring economy because growth is all about productivity increases.
At the same time inflation is always and everywhere currency devaluation. It’s nothing else. When a currency is devalued, suddenly it is exchangeable for fewer goods and services. All of which explains the historical why behind gold-defined money. It wasn’t mysticism or religion or the state that tied money to gold; rather workers desired equal value for their production. Money that had a gold definition wouldn’t lose value. In other words, money defined in terms of gold would mean no inflation. It’s that simple.
Let’s keep this in mind with the present very much in mind. While there are varying views about whether or not what we’re experiencing is inflation or the expected consequence of supply-chain vitiating lockdowns (there’s a difference between higher prices and inflation, but that’s another column), what cannot be denied is that the pain of higher prices is very much being felt by U.S. workers, and for that matter, workers around the world. With good reason. Work is about the getting as previously stated, yet now our dollars don’t stretch as far.
In which case the short and long-term answer is simple: let’s redefine the dollar in terms of a commodity that currencies have been tethered to for centuries as a way of avoiding the devaluation that is inflation. Gold is the forever answer to the scourge that is inflation. And for those who think a gold-defined dollar would limit so-called “money supply,” think again. To presume the latter is as foolish as saying a 12-inch foot limits the number of foot rulers. No, it doesn’t. Length is a measure. So is money. A price rule for the dollar would in no way limit supply of same. Money supply is production determined. End of story.
How could a return to a gold exchange standard come about? It would be as simple as President Biden, or a future Republican president instructing the U.S. Treasury to do just that. Presidents get the dollar they want.
Though Reagan to his own regret didn’t turn his monetary rhetoric into reality, and Clinton didn’t follow his political hero (JFK) back to a gold-defined dollar, it’s no surprise that the economy boomed under both. The administrations of Reagan and Clinton were clear in their communications from Treasury that a strong, stable dollar was good for the U.S. And for obvious reasons.
The prosperous companies and jobs that emerge from prosperous companies are a direct consequence of investment. When investors put their dollars to work, their goal is returns in – you guessed it – dollars. In that case, the happy fact that the U.S. economy and stock markets soared under Reagan and Clinton was a statement of the obvious. When money is broadly trusted, investors can much more aggressively put wealth to work.
It’s all a way of saying that money defined in gold wouldn’t just ensure that U.S. workers would no longer suffer the evisceration of their work and savings through devaluation. It would also mean that the range of work options available to Americans would soar impressively.
Stable, well-defined money is the only realistic response to any inflation question. Better yet, both U.S. political parties have a long history in favor of non-inflationary money. Looked at in terms of the present, it’s not if the inflation problem will be solved, but which political party will wake up to what is good economic policy, and by extension brilliant politics.
John Tamny is vice president at FreedomWorks and the Director of FreedomWorks' Center for Economic Freedom.