convert their bank deposits into something a bit shinier, demand exceeded supply, and in 1933, the United States announced that it would no longer agree to such exchanges.
This didnât mean that the United States, or anyone else, abandoned the gold standard; after World War II, most of the worldâs large economies agreed to fix their own currencies to the U.S. dollar, and the United States agreed to fix the price of gold at $35 an ounce. And so it stayed, until 1971, when President Richard Nixon announced that dollars would no longer equal a fixed amount of gold (and he didnât stop there, imposing a ninety-day freeze on all wages and prices in the United States), shocking the worldâs financial system and introducing the volatility that weâve lived with ever since.
The volatility of the last forty years hasnât been a curse, but as blessings go, it is a pretty complicated one. Because once a dollar is unmoored from a given amount of goldâthe term is âfloatingââit starts to act like a share of stock, which means that its value is whatever a bunch of traders think is its future value. This kind of risk is hedged by derivatives , CDO s, and other complicated financial instruments, with a lot of potential for profitâand mischief.
On the other hand, returning to a gold standard, or something like it, isnât really all that attractive either. Though requiring the government to have a given amount of gold for all the money in circulation prevents inflation (by definition, you canât have more dollars around than you have gold) and reduces uncertainty, it also creates the risk of deflation whenever the economy grows faster than the gold supply. According to the U. S. Geologic Survey, the total amount of gold that has ever been mined is âonlyâ about 142,000 metric tons, 9 which, at a price of $1,200 an ounceâwhat it was trading for as of July 2010âwould be a bit less than $5 trillion; and the Federal Reserve calculates that nearly $9 trillion is currently in circulation in the United States alone.
Some pretty sane economistsâand a whole lot of libertariansâstill think that it might be worthwhile to return to some kind of âhardâ currency. Iâm not one of them, though Iâm sympathetic to anything that takes control of the economy out of the hands of a bunch of bureaucrats. It might be a more stable world if the dollar were tied to something like gold (though the argument that paper has no âintrinsic valueâ isnât very persuasive either; whatâs gold good for, anyway, other than filling teeth and making jewelry?), but Iâll take my chances on letting the marketplace set the prices of most things, including the folding money in my pocket.
Hayek, Friedrich A. Political philosopher and economist (1899â 1992) who made basic contributions to the study of free-market capitalism, price signals, and monetary theory. Author of, most famously, The Road to Serfdom . Winner of the Nobel Memorial Prize in Economic Sciences in 1974.
From the 1920s, when the Austrian-born Hayek was hired to work at the London School of Economics by Ludwig von Mises (another member of the free-market pantheon), until his death, he was collectivismâs fiercest enemy. Part of his hostility to the enthusiasm for state control of the economy, which has been such a durable part of the European mind-set, was Hayekâs belief that it led directly to totalitarianism, which, given the history of Europe since the 1930s, is supported by an awful lot of evidence.
But he didnât just oppose it on political grounds. Collective decisions about economic issues require some kind of overall authority, and while they do a lousy job, they have always had a lot of appeal to Progressives. And some, but by no means all, ten-year-olds.
Â
âBlake?â
âYes, Dad?â
âWhen you have a bake sale at school, who decides that
This didnât mean that the United States, or anyone else, abandoned the gold standard; after World War II, most of the worldâs large economies agreed to fix their own currencies to the U.S. dollar, and the United States agreed to fix the price of gold at $35 an ounce. And so it stayed, until 1971, when President Richard Nixon announced that dollars would no longer equal a fixed amount of gold (and he didnât stop there, imposing a ninety-day freeze on all wages and prices in the United States), shocking the worldâs financial system and introducing the volatility that weâve lived with ever since.
The volatility of the last forty years hasnât been a curse, but as blessings go, it is a pretty complicated one. Because once a dollar is unmoored from a given amount of goldâthe term is âfloatingââit starts to act like a share of stock, which means that its value is whatever a bunch of traders think is its future value. This kind of risk is hedged by derivatives , CDO s, and other complicated financial instruments, with a lot of potential for profitâand mischief.
On the other hand, returning to a gold standard, or something like it, isnât really all that attractive either. Though requiring the government to have a given amount of gold for all the money in circulation prevents inflation (by definition, you canât have more dollars around than you have gold) and reduces uncertainty, it also creates the risk of deflation whenever the economy grows faster than the gold supply. According to the U. S. Geologic Survey, the total amount of gold that has ever been mined is âonlyâ about 142,000 metric tons, 9 which, at a price of $1,200 an ounceâwhat it was trading for as of July 2010âwould be a bit less than $5 trillion; and the Federal Reserve calculates that nearly $9 trillion is currently in circulation in the United States alone.
Some pretty sane economistsâand a whole lot of libertariansâstill think that it might be worthwhile to return to some kind of âhardâ currency. Iâm not one of them, though Iâm sympathetic to anything that takes control of the economy out of the hands of a bunch of bureaucrats. It might be a more stable world if the dollar were tied to something like gold (though the argument that paper has no âintrinsic valueâ isnât very persuasive either; whatâs gold good for, anyway, other than filling teeth and making jewelry?), but Iâll take my chances on letting the marketplace set the prices of most things, including the folding money in my pocket.
Hayek, Friedrich A. Political philosopher and economist (1899â 1992) who made basic contributions to the study of free-market capitalism, price signals, and monetary theory. Author of, most famously, The Road to Serfdom . Winner of the Nobel Memorial Prize in Economic Sciences in 1974.
From the 1920s, when the Austrian-born Hayek was hired to work at the London School of Economics by Ludwig von Mises (another member of the free-market pantheon), until his death, he was collectivismâs fiercest enemy. Part of his hostility to the enthusiasm for state control of the economy, which has been such a durable part of the European mind-set, was Hayekâs belief that it led directly to totalitarianism, which, given the history of Europe since the 1930s, is supported by an awful lot of evidence.
But he didnât just oppose it on political grounds. Collective decisions about economic issues require some kind of overall authority, and while they do a lousy job, they have always had a lot of appeal to Progressives. And some, but by no means all, ten-year-olds.
Â
âBlake?â
âYes, Dad?â
âWhen you have a bake sale at school, who decides that
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