By Brian Domitrovic,Contributor

Copyright forbes

The gold standard is a profile in power. So LBJ conspired to get rid of it. (Photo by UPI/Bettmann Archive/Getty Images)
Getty Images

The gold standard did not prevent the hyperinflation of the 1970s, or the slowdown in growth the American economy in the 2000s. The gold standard ended in 1971—what can it mean that it failed to prevent ill outcomes after it settled on the ash heap of history?

It is a common argument among Bitcoiners. If gold had fully succeeded, it would have prevented its demise. The very departure of gold from the global monetary system—at the hands, to be sure, of political (particularly American) leadership determined to kill it and never have it return—means that gold was not good enough to base a monetary system. Because gold could not see itself through the very fight for its existence, it failed. And in failing, it has ceded the ground for a superior alternative of anther nature.

Bitcoiners can be suspicious of the gold standard on a number of particular counts. The transactions medium could never generally be gold itself, because it was cumbersome to divide into very small, or to use in very large units, and the location of the actual stuff determined where a transaction could take place. It was not convenient enough for carrying or on a storage basis, or large enough in value, to be good for the total money supply of the economy. On these and other criteria, Bitcoiners will wonder if gold was not an inferior, if impressive predecessor to their own new ingenious medium.

Gold had its day. It fought the fight and lost, creating space for a usurper to rise up from the cleared ground. Fiat money has held sway for fifty years, but the emerging hegemon is Bitcoin. Gold is irrevocably a part of the past. So can go arguments in this vein.

If it might be said that the gold standard failed, it most certainly can be said that the gold standard succeeded. The incredible growth of the industrial revolution in the nineteenth and early twentieth centuries occurred under “specie” standards, sometimes gold and silver together and sometimes gold itself. Issuers of currency, be they private or governmental (and they usually were private), defined their currency offerings in terms of specie.

MORE FOR YOU

The record of economic achievement under specie standards, and the gold standard in particular, has no rival in history. The incredible powering into the agricultural and industrial revolutions, which brought incomprehensible increases to living standards, from the eighteenth through the early twentieth centuries, occurred while currency had a specie basis. The link was clear as the industrial revolution proceeded over its many decades. Whenever the price of gold started to rise in the private markets in a currency, issuers of that currency would curtail their issuance. And whenever the price of gold started to fall in those markets, issuers of currency—and again, it was private entities who were the main issuers of currency in these eras—scanned the economy for new great ideas and created gold-defined currency to finance them.

The system worked so well that it gave us mass prosperity and an unimaginable rise in business, technological, and productive possibilities. Incredible products that had never existed—these by the thousands, by the millions, came into being as gold was the basis of currency systems.

We discuss this history extensively in our new book on the harmony of Bitcoin with gold, Free Money: Bitcoin and the American Monetary Tradition.

Ontologically, success is superior to failure. If gold succeeded and then failed, its success, in its epic-ness, should be the primary focus of our productive attention. Its failure—if it is that—is a secondary, if still important issue, a matter of low-order forces (if fully institutionalized ones) conspiring to stomp out apex success.

Why did the gold standard depart—not the same formulation of “why did the gold standard fail?” The standard answer is that there was not enough gold. The dollar was the only currency on gold in the 1960s, and everybody wanted the dollar. Therefore, there was not enough gold to back the dollar. This argument, advanced originally and apparently most effectively by economist Robert Triffin, is justifiably refuted by pointing out the lameness of Triffin as a personality. He was a mediocre Yale economist. Who cares what he says? And when did the quantity of gold with respect to the currency float ever matter as the industrial revolution soared? Gold never kept up with the money supply in those amazing days.

Surely the United States, under Johnson and Nixon, took the dollar off gold for other reasons—jealousy high among them. A country that wants to maintain tax rates rising past 70 percent—Johnson and Nixon put on tax increases that made sure that the top rate of the income tax was past 70 percent—will cause a shunning of its currency. But if the currency is shunned, and it is on gold—the gold standard will be ruined! How delicious it is to kill the economy through high taxes, so as to eliminate the independent standard of the monetary regime—gold.

The pointing to Triffin’s arguments were, surely, little more than power’s attempt to attach an intellectual patina to base motives. The United States killed the gold standard so that it could maintain otherwise untenable structures such as high progressive taxation.

All I ask is whether Bitcoin is ready for this kind of fight. The American public proved sufficiently unimpressed with stagflation, in the 1970s, to roust it out of existence by means of the Reagan revolution. But that tax-cut revolution, in forcing gold down from $800 to $300, resulted in no formal monetary reform, no commitment to a gold standard. George W. Bush and Barack Obama showed fascination with not cutting top tax rates, and gold soared in the first decade of the 2000s. Totally justifiably, Bitcoin emerged in 2008 to call power to account.

Whatever monetary system we settle in with in the twenty-first century, it must aspire to attend mass prosperity, mass opportunity, mass success. This is what the gold standard achieved par excellence. If Bitcoin is to be our new money, an alliance with gold remains wholly in order.

Editorial StandardsReprints & Permissions