Reframing the Gold Standard Debate: The Fixed Money Supply Standard

A debate between those who advocate a fiat money supply and those who advocate a gold standard has raged for nearly a century. It is time to reframe this debate in order to highlight some of the intrinsic properties of gold that are relevant to this controversy and to inform the debate on the use of gold as the philosophical basis of a smart monetary policy and careful.

It’s clear: each side in this debate seems to like to insult the intelligence and wisdom of the other. Consider, for example, the point of view of H. Parker Willis, the first secretary of the Federal Reserve Board:

“Central banks will wisely set aside their inexperienced companies in half-baked monetary theory, meticulous statistical measures of trade, and hasty crushing of speculative interest axes with their suggestion that by doing so they achieve some sort of of vague “stabilization”. ‘it will, in the long run, be for the greater good.

On the other hand, a frequent rejection by advocates of a gold standard is that there is no difference between wampum, large rocks, and gold. However, this assertion is a false equivalence. By comparing gold to something most don’t take seriously – wampum or large boulders – critics intend to conjure up images of presumably primitive cultures and their presumed naive beliefs about the economy, dismissing thus simultaneously the views of defenders of the gold standard.

At best, an evocation like this creates a contextual chasm from which it is difficult for the “golden bugs” to break out as they attempt to defend a position that looks silly from the start. But much worse is that the golden bugs often respond with a passionate tint and cry for their precious metal without ever talking about the intrinsic philosophical value of their point of view.

Despite what is often said, the genius of the gold standard is not that it rests on something “real”; as “real” is simply a layman’s way of saying that there is a demand curve for the good. The wampum also had a demand curve at one point. No, the genius of the gold standard is that it involves one important rule:

No currency will exceed the money supply.

In other words, it implies a fixed denominator in the measurement of economic growth and money supply. The importance of this concept is already recognized. This is why we “adjust inflation” to economic growth by recognizing that the denominator is plastic. Without adjustment, our measure of the real state of the economy is distorted. Just as is the case when monetary policymakers are allowed to virtually create a money supply and the money is then made more important by the multiplier effect.

Thus, a law on the “fixed money supply” could replace a “gold standard”. Of course, it seems to be human nature to tip excessively. That is, do people really have the courage and discipline to stick to a fixed money supply / no money printing law? Or would another round of over-indebted banks or over-indebted investors in another, unfortunately too predictable future, ask a monetary authority for an inflationary tonic to cure them of excess debt?

It is too easy to wave the hand of fiat money or pull the lever of fiat money until months later inflation measures register a second positive moment. By comparison, the gold stock is roughly fixed, limited in expansion by its scarcity and difficulty of extraction. Essentially, the scarcity of gold and the difficulty of mining serve as an artificial law or barrier to diluting the intention of a fixed money supply law: do not print money.

If both sides could look beyond gold and debate instead what qualities a future monetary framework should have, they might find that among the important criteria that a fixed money supply standard must meet are:

  • A good that has an almost universal demand curve
  • A good whose supply is practically fixed

Although I discussed the second criterion above, the first criterion is also important. Why? Because without an almost universal demand for the good, people will be inclined to switch to another good when it suits them. Thus, a nation that would like to get out of debt problems would do another good as the basis of its fixed money supply regime. Think: the Chinese declaring the Great Wall as their currency or the United States declaring the Statue of Liberty as the basis of their money supply in the future. Both are bulky and in fixed supply, but those in Madagascar couldn’t care less. For a good to be considered viable, its demand curve must be near universal.

Because gold meets both of the above criteria, it turns out that a natural candidate is at the center of a fixed silver supply regime. The alternatives, including the wampum in its time and place, satisfied both of the above criteria. Right now, carbon credits meet these criteria as well, and in fact, they have served as a viable way to deal with another delusional good: pollution.

The gold bugs are usually forced to defend the intrinsic value of gold as a substance, which seems silly to those who disagree with their point of view. This makes bugs vulnerable to criticism. I contend then that the debate on the gold standard must be lifted from the “gold standard” to its true implicit core: the standard of fixed money supply.


Please note that the content of this site should not be construed as investment advice and that the opinions expressed do not necessarily reflect the views of CFA Institute.

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Jason Voss, CFA

Jason Voss, CFA, is relentlessly focused on improving the ability of investors to better serve end customers. He is the finalist for Foreword Reviews Business Book of the Year, The intuitive investor and the CEO of Active Investment Management (AIM) Consulting. Voss also subcontracts for the well-known firm Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, LP, where he co-managed the Davis Appreciation and Income Fund with outstanding returns. Voss holds a BA in Economics and an MBA in Finance and Accounting from the University of Colorado.

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