Ayn Rand and the Gold Standard
Posted by hyperpat on December 22, 2013
This is the first in a series of posts that will look at the philosophical points Rand presented in Atlas Shrugged. I picked on this particular item to tackle first because its probably the easiest to debunk, and it’s an item that I flagged as invalid even on my first reading of this book back in 1965, when the US was still nominally on the gold standard.
Rand makes several references throughout the book that gold is the only ‘true’ money, that anything printed by a government is essentially valueless as governments can always print more bills, essentially creating value from nothing. But she is making a very basic logical error, that just because gold has been used for many centuries by many cultures as a yardstick of value, that gold has an intrinsic real value. This is obviously false. If you are standing naked on an iceberg, which would you rather have: a nice warm parka or a pound of gold? If you answer this by choosing gold, then I’m afraid you’ll not be around for very long.
Gold’s value is relative to what use it can be put to. Clearly it won’t directly help in a survival situation, and gold has very few everyday uses other than for jewelry and electronics. But if there was an Inuit standing on the other side of that iceberg who had an extra coat that he would be willing to give you in exchange for that pound of gold (because he likes how it looks, and he’s not freezing!), now that gold has some real value. This illustrates that the value of any gold you have is dependent on what other people are willing to exchange for it.
So why has gold been used as a currency standard by so many for so long? Gold has several properties that make it useful (but not essential) for this purpose. It doesn’t corrode (do you really want that money you stuffed under your mattress to turn into crumbling powder a year from now?), it’s not flammable and resists acids quite well, it’s quite malleable and easy to strike into coins that are easy to carry, it is relative rare and takes a fair amount of effort to find, extract and refine (if your money was based on, say, timber logs, then everyone could go chop down their backyard tree and presto! they have more money – except, when everyone does this, no one would want more timber logs) . It’s this last property that Rand seized on – governments can’t just create a new ton of gold whenever they want; the supply is limited and not likely to grow substantially in any human-life time frame.
But gold is not money! Money is merely a medium of exchange, a human invention to allow for the exchange of goods between various parties without the hassle of barter – my bushel of wheat for Joe’s ounce of salt, that I will then use to trade for Jimmy’s rabbit – barter as a system is unwieldy and does not scale with increasing population densities. Anything can be used as such a medium, from cowrie shells to, yes, salt (they’ve both been used as such). All that is required for something to serve as money is that all the parties in a society will accept the item as a marker of value, and the same people have pretty much the same appreciation of what the value of one unit of that marker is.
So what will change people’s valuation of the worth of that marker? Like almost anything else, the value of a currency is dependent on supply and demand. If a government prints more and more markers, supply goes up, but the value of each marker will only thereby go down if there is not an equal increase in demand. What causes the demand to increase? Production of more goods, things that have intrinsic value (food, clothing, housing, etc), and more people. If the supply of markers was totally static, population increase alone would eventually increase the value of the markers (only so many to go around!), so governments (or whoever is controlling the supply) do need to make more markers available over time. How many to make is not clear cut; clearly if way too many are made, you end up with the hyperinflation of post WWI Germany; too few can lead to a brake on growth and recessions.
But forcing a government to limit its marker supply to the amount of gold it has in its treasury (as Rand basically advocates) is idiotic. Money is a tool, and like any tool needs to be used correctly. Using gold as a basis for a currency does impose some limits that would help curb irresponsible spending, but the real answer is for the government to act in a responsible manner at all times – and if it doesn’t, it’s time for a new government, which will almost automatically occur if hyperinflation sets in.
The ultimate value of any currency is dependent on the people who use it having confidence that everyone else will accept it, will be willing to trade things of value for it. Here the Tea Party has some valid points. They are insisting that the US government limit its spending and have a concrete plan for how to pay for the things the government is funding. Both of these items are likely to increase everyone’s confidence in the long-term viability of the dollar. But adamant, no compromise allowed, stances on these issues to the point where the government must shut down does just the opposite, and can do real harm to our economy and everyone’s standard of living.