April 6, 2013

What's so Great about the Gold Standard?

In our age of Quantitative Easing (a.k.a. money printing) there is an ideological trend towards sound money.  These recent Inflationary policies enacted by the Federal Reserve have led a lot of conservative-minded people to vilify Fiat Currencies and call for a return to the Gold Standard.   So, what does the Austrian School of Economics have to say on the subject? 
Many laymen economists point to the “intrinsic value” of gold as a reason for the return to the Gold Standard.  The arguments go like this: “Fiat Currency is nothing but paper. Gold has an intrinsic value.” While this is a true statement and perhaps even a good argument in favor of the Gold Standard, this is not necessarily the Austrian view on the subject.    
In A Free-Market Monetary System, Fredrick Hayek argues in favor of the Gold Standard, but not for the reason many might expect.   In his mind, Fiat Currency is not the problem; government inflating the supply of Fiat Currencies is the problem.   Gold, on the other hand, has a fairly constant value because its quantity is limited to the amount of gold in existence.   But the same could be true of a Fiat Currency; if a paper currency has a constant supply, it could be a fairly consistent store of value just like gold.   
So if Fiat Currency isn't the problem, what is?  According to Hayek, unreasonable governments are the problem.  He writes, “Government will behave reasonably only if it is forced to do so”.   The problem with Fiat Currency is that it doesn’t force the government to act reasonably; they can print as much of it as they want.  The reason he advocates the Gold Standard is because, “The gold standard is the only method we have yet found to place a discipline on government” (pg.11). 
So is a government backed Gold Standard the best solution?   Not necessarily, according to Hayek.  It’s certainly better than the “Quantitatively Eased” US Dollar.  But the ultimate solution is the free-market.  If the government didn’t have a monopoly on money creation, free-enterprises would be able to make competitive Fiat Currencies.  They would have a competitive reason to keep the supply of their currencies constant, and thus solve the problem of unreasonable governments over-printing our money. 

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