The gold standard is nothing but a shiny distraction

And it offers a false sense of security in an unstable world, says Philip Pilkington.


© Dominic Bugatto

When you descend deep down the rabbit hole of goldbug culture you find some distinct personality types. Perhaps the most straightforward of these goldbugs come across as simple sales people – perhaps even con artists – looking to sell readers, listeners and viewers a financial position in gold or gold-related investments.

Their mantra is that ‘fiat money’ is condemning us to a hyperinflationary apocalypse. Paper currency will soon become worthless. Society will then decompose. Only those clever enough to buy gold will come out on top – Kings of the Wasteland, laughing at the naïve fools who had faith in banknotes.

Then there are some goldbugs who take it a step further and overlap with softcore (and not so softcore) conspiracy theorists. Such people also push the idea of hyperinflation but add in conspiracies involving dumbing down the population through water fluoridation, advanced Skynet-like computer systems geared toward the extermination of humanity, or central banks run by members of the mysterious Illuminati.

Goldbug culture weaves fascinating narratives that seek to circumvent the reality of the political and economic systems under which we all live. It spins colourful tales whose emotional impact is based on a fearful paranoia and distrust of social institutions. At worst it tumbles into the pathological end of the political spectrum.

But otherwise quite sane people can also carry around in their heads conceptions of how our economic systems function that draw their attraction from similar fantasies. This more modest make-believe draws its power from simple morality tales drawn from analogies with daily life – a government finances itself like any ordinary household, ‘money-printing’ leads automatically to hyperinflation and so on.

All such fantasies have one thing in common: they speak to the certainty people crave in an uncertain world. Economic and financial systems are enormously complex and capitalism, improperly managed, has an inherent tendency toward instability.

When the system unravels, people need to form narratives to explain what is going on around them. Such narratives can be grossly misleading and quite disempowering for those who cling to them. They are then seized on by those who seek to protect vested interests and utilized to ensure that people do not ask realistic, but dangerous, questions.

Narrative breakdown

Perhaps it is best to start in 1971, the year that the Bretton Woods system began to break down. The Bretton Woods system tied most of the world’s currencies to the US dollar and tied the US dollar to gold. This situation worked extremely well for the US between 1945 and the late-1960s when it was running trade surpluses with the rest of the world.

It did not work quite so well for underdeveloped countries who ran trade deficits, became indebted to the IMF and the World Bank and ruined their economies through the so-called ‘stabilization programmes’ that those institutions forced on them.

The simplistic narrative that the era of the post-War gold standard was one of unqualified prosperity ignores the fact that the trade surpluses that allowed the US to prosper were mirrored by trade deficits and indebtedness elsewhere.

The Bretton Woods system broke down in 1971 when the US began to run trade deficits. It needed more imports from abroad in order to fight the Vietnam War which was becoming more expensive by the day. After a period other countries, most notably France, started to ask the US to repay its debts in actual gold.

Knowing that the US was badly overextended, then-President Richard Nixon moved to close the gold window in August 1971. Since then most of the world economy has been operating by what is called a fiat currency system – one where governments decide how much money to print. Imbalances and distortions within the Western economies continue to grow.

Bunker economists tell people that a return to the gold standard will solve our problems. It would merely lash constraints on government finance and send the world economy into a tailspin

Unfortunately, too many people, on both the left and the right of the political spectrum, draw a causal link between the suspension of the gold standard and such imbalances. But this link is spurious at best. A far better way to think about this is that as confusion set in around the suspension of the gold standard and the tectonic shifts then taking place in the world economy – most notably the rise of manufacturing giants Japan, Germany and later China – powerful forces seized an opportunity to radically redistribute income.

The monetary system responded to this by propping up incomes and hence the consumption of the bottom segment of the population by extending huge amounts of private credit. By 2008 this debt Ponzi scheme collapsed in on itself and stagnation set in. The underlying inequality in income distribution ensured limited consumption among 95 per cent of the population at the bottom of the ladder.

Distraction and spin

The bunker economists tell people that a return to the gold standard will solve our problems but it definitively will not. When household consumption collapsed in the wake of 2008 the government had to step in to provide spending to keep the economy afloat and the unemployed fed. A gold standard would merely lash constraints on government finance, cut off this lifeline and send the world economy into a tailspin.

This is exactly what those on the extreme right wing want, because it would mean that they could engage in austerity programmes like the one thrust upon Greece. This, in turn, would allow them to demolish large parts of the welfare state and strip the government of its assets through privatization programmes.

Bretton Woods did not work quite so well for underdeveloped countries who became indebted to the IMF and the World Bank and ruined their economies

In order truly to understand the forces that led to the 2008 crisis we must understand income inequality. With wealth concentrated so heavily at the top-end of town, most people have no choice but to borrow to maintain their living standards. If we simply cut off this borrowing by trying to constrain money creation, these people will lose the two lifelines they have left – namely, government services and access to credit – and the economy would collapse completely. If we want to deal with the imbalances that lead to overextensions of debt we have to go right to the cause: inequality.

Too many are fooled by the simple narratives spun by bunker economists. Scared and confused, they become distrustful of government institutions and turn in on themselves, hoard gold (if they can afford to) and become disengaged from the political process.

Unable to understand the complex problems we face, they turn to shyster investment managers who prey on their fear or to conspiracy merchants who misdirect their attention away from reality and toward Hollywood-like fantasies. Gold is nothing but a shiny distraction – a glistening lie that lulls people into feeling a false sense of stability in an unstable world. Our world remains unstable precisely because those in power have built it that way.

Philip Pilkington is a London-based economist and member of the Political Economy Research Group at Kingston University. He runs the blog Fixing the Economists: