The Gold Standard – Introduction

Understanding Gold 5

I deem the idea that everyone understands gold’s value but few understand why it has value, the gold paradox.  The primary reason is that academia, over the last 80 years, has increasingly dismissed gold as a monetary proxy and has no institutional knowledge or memory of how a gold standard works or why.  There is no higher level academic path oriented in a classical economics curriculum to attain this knowledge.  The main deterrent is that academia instructs economics students in the mathematical demand-side consumer model to the exclusion of the behavioral supply-side producer model, also termed classical economics.  This erases a large library of economic thought with a proven history of success.  To learn classical economics, based on sound money, requires study outside the formal education system.  This is best suited for those without the baggage of institutional demand-side knowledge.  It is extremely difficult to unlearn something and almost impossible to reject education and knowledge that required great effort and sacrifice to attain.  For this reason, almost all adherents of classical economics are non-credentialed citizen economists who are immediately dismissed because they are not credentialed.  To attain credentialed status requires indoctrination in the demand-side model that rejects the classical model.  This is the economic catch-22.  To be taken serious requires being credentialed, but being credentialed requires ideas that shouldn’t be taken serious. 

It has led to what James Grant terms the Ph.D standard.  The Fed, led by academics, is applying their Ph.D credentialed academic theories—everything works when proven by a mathematical equation on paper—to the real world.  The result surrounds us in our bizarro world of negative interest rates, low growth, financialization, unsustainable debt, monetary devaluation, central bank manipulation of interest rates, conundrums, and every fundamental economic indicator gone haywire.

Classical economics requires sound money.  History has proven that gold’s value is stable, so a gold standard is a tenet of classical economics.  Great Britain, the U.S., and all developed countries operated gold standards in some form for most of the period between 1694 and 1971.  This seems like a phenomenon that should occupy a large chapter of economic thought.  Instead, academia dismisses a gold standard with only the most cursory of acknowledgement, almost all which is faulty.  Into this vacuum has stepped all matter of confusion regarding gold.  Today, the subject of gold will elicit as many opinions as there are individuals discussing it.  The heart of the subject remains, why is gold stable in value and how is its stability properly applied to the monetary realm through a gold standard to achieve sound money without inflation or deflation?

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