Among the many amazing things the gods of irony and absurdity have showered upon us in the last decade or so, I have to score serious discussion of a gold standard for money very high. Many years ago an economist friend explained that Marx’s labor theory of value was correct, but trivially correct, because there could just as well be a chocolate theory of value or a widget theory of value. Or a gold theory of value, and indeed there is: everything in the world has a value in gold that you can easily calculate from the ratio of the money prices of gold and that thing at the moment. Also a value in tons of scrap paper for delivery on the dock in Long Beach on Oct. 23, or hours of labor by X at task Y. A gold standard for a society much larger than you and two or three friends is the kind of thing that can only be proposed by someone who thinks economics is about money, or that money is what makes stuff worth having. Or that the mechanism of operation of sleeping pills is that they have the dormative virtue.

Gold has some advantages over stuff like waste paper as a conventional medium of exchange. It’s practically inert, so it doesn’t decay, evaporate, or corrode and with a tidge of alloying metals, can be made hard enough to withstand abrasion and wear. It’s ductile and easy to forge into convenient shapes with good detail retention, and reasonably easy to assay for purity and genuineness. It’s pretty to look at and stays shiny.

It’s also scarce: all the gold that has ever been mined would fit in a cube about 65 feet on a side, and would weigh about as much as a couple of nice aircraft carriers. Fortunately, for practical uses like dental crowns, electrical contact plating, and the like, a little goes a long way because nearly all of these applications have to do with surface properties and not mass, and it’s easy to spread, plate, and draw very thin. So, handy stuff, scarce, pretty: hooray for gold.

The idea of denominating business claims and obligations in ounces of gold, however, is deeply bizarre. Suppose you lent someone an ounce of gold, repaid at 5% interest next year as 1.05 oz (of course this would all be managed by entries in computer accounts, or at least paper gold certificates), and a mining company made a big find, or someone figured out how to get it out of sea water (where a fair amount is very thinly dispersed) cheap. Or floods trash the Indian economy, and a bunch of the very big pile of gold held by women there as jewelry gets spent for food and clothing. Your debt would be repaid with something with which you can get a whole lot less of what you really want (lunch, movie tickets, gas for your car, etc.), and vice versa, than when you made the deal. Ow! You and all the other creditors in the world are sad; debtors are glad. And this massive transfer of wealth is good for the world how? You may or may not favor some inflation, but I’ve never met anyone who thinks the fortunes of a specialized corner of the mining industry, or the Indian domestic economy, is an excellent thing to peg it to.

As you can imagine, a couple of episodes like this and the government will be actively scarfing up gold, or selling it for something like coal or land, to stabilize prices, and the current gold bugs will be the first in line to demand it do so. We’ll be executing a monetary policy not importantly different, but a lot less convenient, than the one we have now.

Gold has intrinsic value, just like everything else in the world, but its value is no more intrinsic that all the other stuff; just like hog bellies for next June, or federal reserve notes, it’s worth what everyone in the world decides it’s worth after they make all the possible deals that look good to both sides. And it will be that way whether or not a government is loony enough to declare it legal tender by the ounce.

Next hare-brained scheme, please.

[Cross-posted at The Monkey Cage]

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Michael O'Hare

Michael O'Hare is a Professor of Public Policy at the University of California, Berkeley.