What role should gold play in our econ­omy?

The Washington Post Sunday - - BOOK WORLD - RE­VIEW BY SI­MON JOHN­SON Si­mon John­son is head of the global eco­nomic and man­age­ment group at MIT’s Sloan School of Man­age­ment. He was pre­vi­ously chief econ­o­mist of the In­ter­na­tional Mon­e­tary Fund.

What is gold? Is it the es­sen­tial bedrock of fis­cal pru­dence? Is it a po­lit­i­cal foot­ball, with for­tunes and im­por­tance de­ter­mined by far greater forces? Or is it a mere dis­trac­tion at the mar­gins of the global fi­nan­cial sys­tem — at­tract­ing a dis­pro­por­tion­ate num­ber of scams and odd­ball po­lit­i­cal char­ac­ters?

Gold in the Amer­i­can eco­nomic sys­tem has been all of th­ese and in that or­der. James Led­bet­ter weaves a highly read­able tale, from the ori­gins of the re­pub­lic to the du­bi­ous spon­sors of Glenn Beck on Fox News (a bril­liant con­clud­ing chap­ter). Too of­ten, this kind of eco­nomic his­tory be­comes dry and even so­porific. But Led­bet­ter, the ed­i­tor of Inc. mag­a­zine, has a fine eye for per­son­al­ity and ideas; each of the 12 chap­ters puts you on the spot at a crit­i­cal mo­ment on the Amer­i­can jour­ney with gold, with anec­dotes nicely blended to cre­ate the broader his­tor­i­cal con­text.

You can read it in chrono­log­i­cal or­der, or you can dip a toe in at any point, al­most the ideal sum­mer read­ing. Or — my fa­vorite for this kind of tale — watch the story un­fold back­ward; start with the mod­ern and fa­mil­iar, and see how far you need to go back in time be­fore it feels like you are read­ing some­thing straight out of Marvel Comics, with big char­ac­ters and mo­ti­va­tions that now seem strange. The most com­pelling ma­te­rial ex­plains how Pres­i­dent Franklin D. Roo­sevelt re­luc­tantly yet ef­fec­tively, and with very good rea­son, ended the way gold had op­er­ated over the pre­vi­ous half-cen­tury. But Op­er­a­tion Goldfin­ger is also highly en­ter­tain­ing — a 1960s public pol­icy es­capade, in­spired by the James Bond movie.

The broader plot line is this. The Amer­i­can re­pub­lic was ini­tially bank­rupt, a point that the hit mu­si­cal “Hamil­ton” made more ef­fec­tively than any mid­dle school his­tory les­son. A mon­e­tary sys­tem sub­se­quently mod­eled on that of Bri­tain in­cluded gold as an an­chor of value for pa­per money and bank de­posits. This sys­tem pro­vided suf­fi­cient sta­bil­ity in good times — along with plenty of op­por­tu­nity for fi­nan­cial spec­u­la­tion and shenani­gans — and could also be sus­pended when cir­cum­stances dic­tated, most no­tably dur­ing the Civil War.

At the end of the 19th cen­tury, there was a fas­ci­nat­ing, pro­longed and only-in-Amer­ica fight over the ex­tent to which a gold stan­dard was still help­ful for pros­per­ity — ac­com­pa­nied by the book “The Won­der­ful Wiz­ard of Oz,” one of the most loved (if now mis­un­der­stood) pieces of po­lit­i­cal pro­pa­ganda ever. Dorothy from the prairie, her pop­ulist com­pan­ions and the ma­gi­cian of ounces (ab­bre­vi­ated Oz) of gold all res­onated with peo­ple fol­low­ing con­tem­po­rary pol­i­tics — al­though mod­ern ex­perts still ar­gue about the pre­cise point L. Frank Baum was try­ing to make. The pro-gold side even­tu­ally won, only to see the ba­sis of their beloved sys­tem un­der­mined and even­tu­ally swept away by the global im­pact of World War I and the Great De­pres­sion.

From the ashes rose a very clever post-World War II mix of gold and U.S. dol­lars as the ba­sis for in­ter­na­tional trade. This Amer­i­can-de­signed and su­per­vised scheme worked well for re­build­ing Europe and boost­ing U.S. ex­ports, but it could not han­dle the in­ter­na­tional pres­sures that de­vel­oped dur­ing the 1960s. As coun­tries’ ex­ports re­cov­ered, they built up their re­serves of dol­lars — and their claims on gold held by the Fed­eral Re­serve. This sys­tem could last only as long as Euro­pean coun­tries were will­ing to hold dol­lars, and loose Amer­i­can macroe­co­nomic pol­icy un­der­mined the per­cep­tion of sta­ble dol­lar value. When pressed in 1971 to main­tain the value of the dol­lar rel­a­tive to gold at the cost of po­ten­tially cre­at­ing a re­ces­sion that could jeop­ar­dize his re­elec­tion, Pres­i­dent Richard Nixon did not hes­i­tate. The of­fi­cial link be­tween the dol­lar and gold was bro­ken, and the Amer­i­can global sys­tem was fin­ished.

Ex­cept that it wasn’t. In ret­ro­spect, for­eign­ers held a small amount of dol­lar as­sets in 1971, rel­a­tive to the size of our econ­omy. Now they hold much more — in­clud­ing per­haps around half of all fed­eral gov­ern­ment debt out­stand­ing. When the go­ing gets tough, the tough like to hold U.S. gov­ern­ment bonds. Gold has slipped into ir­rel­e­vance. The great Amer­i­can secret to eco­nomic suc­cess has never been that we have more gold or treat it with greater re­spect. In­stead, our ad­van­tage over 200 years is that we are a flex­i­ble and in­no­va­tive peo­ple, with grand ideas and a par­tic­u­lar taste for the risks in­volved in ap­ply­ing sci­ence to new busi­ness en­deav­ors. In all of hu­man his­tory, there has never been a place so good at ab­sorb­ing im­mi­grants and en­sur­ing that they and their chil­dren be­come pro­duc­tive. But, most of all, we con­strain ex­ec­u­tive power, we honor our fed­eral gov­ern­ment obli­ga­tions, and we put very lit­tle re­stric­tion on what you can do with your dol­lars. Plus the rest of the world is con­sis­tently more messed up — to­day and prob­a­bly for­ever.

While not claim­ing to be com­pre­hen­sive, Led­bet­ter catches all the main themes and, through the lens of gold, brings our lat­est predica­ment into clearer fo­cus. From the 1960s, the Amer­i­can right wing re­gained promi­nence in part on the back of ar­gu­ments that a sys­tem with­out gold was com­pletely dys­func­tional and prob­a­bly also im­moral. In their view, with­out an auric an­chor, bu­reau­crats and politi­cians will find sneaky ways to re­duce the value of the dol­lar in your pocket. Un­der Pres­i­dent Ron­ald Rea­gan, there was even a high-profile Gold Com­mis­sion, with the goal of es­tab­lish­ing whether gold should re­sume its his­tor­i­cal role. At the crit­i­cal mo­ment, the de­feat of in­fla­tion — led by Paul Vol­cker, as chair­man of the Fed­eral Re­serve — made the gold is­sue fi­nally moot.

And yet the gold lobby con­tin­ues to fight, in­clud­ing in al­liance with many of the peo­ple who sup­port Pres­i­dent Trump. The Repub­li­can-led House Fi­nan­cial Ser­vices Com­mit­tee has, of late, ar­gued strongly for re­stric­tions on what the Fed­eral Re­serve can do — hark­ing back to rules that pre­vailed un­der the gold stan­dard. The quasi-gold­bugs have a more com­plete grip on power than at any time since 1932.

Theirs is an ap­peal to sup­pos­edly tra­di­tional val­ues, and Led­bet­ter is right that gold still lingers in this sense within the pop­u­lar imag­i­na­tion. But the truth is that all our most im­por­tant es­tab­lished rules and in­sti­tu­tions — the true ba­sis for our mod­ern pros­per­ity — are now se­ri­ously at risk. The dis­torted memory of gold may yet ruin us all.


In the early days of the United States, the na­tion used gold as an an­chor of value for pa­per money and bank de­posits.

By James Led­bet­ter Liveright. 380 pp. $28.95

ONE NA­TION UN­DER GOLD How One Pre­cious Metal Has Dom­i­nated the Amer­i­can Imag­i­na­tion for Four Cen­turies

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