BREAKINGVIEWS-Review: Gold's financial fascination never dies
Friday, 16 June 2017 13:33 GMT
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Kate Duguid
NEW YORK, June 16 (Reuters Breakingviews) – Before winning the presidency and replacing the Oval Office's red drapes with lamé, Donald Trump was lionizing the gold standard (http://bit.ly/2riEUiS). He wasn't alone. Campaign rivals Texas Senator Ted Cruz, Kentucky Senator Rand Paul and Ben Carson also backed reviving a policy that had been abandoned by the global financial system 40 years earlier. James Ledbetter's new book "One Nation Under Gold" helps explain why the outdated idea won't die.
These Republican presidential contenders were not proposing sincere policies with white papers and serious co-authors. Bullion-backed bucks had been discarded for good reason: it was an impractical constraint that, even when it was the law of the land, had to be abandoned when the United States needed money for war or to combat recession.
No countries in the world operates on a gold standard today; there is no consensus on what a standard would look like or how it would be implemented. And, as Ledbetter puts it: "there will never be enough gold in the world to support the U.S. economy at its current size."
Yet gold, the book argues, is woven into the American DNA. It is enshrined in the Constitution which says that states may not "make any Thing but gold and silver Coin a Tender in Payment of Debts." Ledbetter chronicles two centuries of debate over the clause's exact meaning and its implications for a federally distributed currency. The California gold rush of the mid-19th century established the West as a locus of political and economic power, largely because of the immigration it brought, and the subsequent development of industry. The gold rush became part of America's founding myth, and for early settlers, evidence of divine providence.
Sound money, as commodity-backed currencies are known, also appeals to an American tradition of small government. A limited supply of gold necessarily limits the supply of money a government can issue, which in theory limits government spending.
Gold remains of interest to Americans not just as a basis for currency, but also as an investment. Though it pays no dividends and, unlike a company, the size of the asset will not grow, the precious metal is still popular, particularly amid economic insecurity. To wit: in 2011, after the financial crisis, gold prices reached an all-time high of more than $1,800 an ounce.
When presidential candidates talk about the gold standard, they're not just addressing worries about fiat currency, they're also signaling to goldbug investors who have more faith in a scarce commodity than American industry. One of the more interesting arguments comes toward the end of Ledbetter's book. "Listening to today's gold populists, it can be difficult to distinguish between the sales pitch for buying gold and the arguments for gold-backed currency; it seems likely that some of that confusion is a deliberate blurring of passions." Ledbetter's account of gold's association with populism illuminates how these two interests have blurred.
Like bitcoin, gold, as a basis for currency and an investment, appeals to those with little faith in government or the financial system. Anti-gold sentiment in the 19th century and early 20th was associated with the East Coast banking elite, and became linked to big government during Franklin Roosevelt's four presidential terms. Though the United States didn't fully abandon the international gold standard until 1971 – a decision made by the Republican administration of Richard Nixon – its limits were clear when Roosevelt decided paper money would no longer be convertible to gold and the dollar became a permanently managed currency.
Enabling the president to adjust the value of the dollar based on economic need arguably helped the United States to recover from the Great Depression. It also linked Roosevelt's anti-gold policies with what critics deemed to be the socialist programs of the New Deal, as Ledbetter documents. This was enmeshed with a virulent strain of anti-Semitism, and produced a populist movement familiar today: nativist, anti-elitist and anti-government.
The performance of the S&P 500 Index has largely been inversely correlated with the price of gold, affirming our understanding of gold as a safe-haven investment. When faith in the American economy is low, gold prices tend to increase, as was the case in 2011. The trend, however, has been harder to map in 2017. The S&P peaked in June, as Trump's political crises helped gold hit its highest level since he was elected. While that can be explained by gold's status as a safe haven, it may also indicate skepticism about the financial system, government and big business that has persisted since the financial crisis.
Though the price of gold fell from its peak in 2011 as the American economy began to recover, it never returned to pre-crisis lows. That may suggest that as long as American populism has life, so does the country's fascination with the shiny metal.
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