As part of its “Econ Duel” series, Marginal Revolution University (an economics education platform run by professors from George Mason University) recently posted a short debate on “Fiat Money vs. the Gold Standard.” The 10-minute exchange between professors Scott Sumner and Larry White, both of George Mason, focuses on practical details of how monetary systems should work and their implementation. People on either side of the debate will not find much to change their mind, but one takeaway is that massive governmental roadblocks stand in the way of real monetary reform. One important point missed by both economists is that new technology may enable individuals to sidestep the government to a gold-backed currency.
Scott Sumner is a proponent of fiat money, or money that derives its value from government decree, albeit with central banks following rules such as strict inflation targets or nominal targets for gross domestic product growth. He accepts that the 1960s through the early 1980s was a “bad period” for fiat money, with high inflation, but that things improved significantly when central banks adopted targets like 2 percent inflation. Sumner believes that the key takeaway from central banks’ roles in the 2008 financial crisis is that we should target nominal GDP rather than inflation, though he doesn’t get into specifics of why such a target is superior. Sumner largely ignores free banking in his arguments, instead considering a gold standard run by central banks. If we can’t trust central banks not to meddle with rules such as inflation and GDP targets, he states, how can we trust them to not meddle with the rule of a gold standard? Sumner’s chief concern with a gold standard is deflation brought about by potential positive demand shocks for gold.
The most memorable “zinger” in the debate comes in response to Sumner’s argument that a “well-run” gold standard (by central banks) falls short of a well-run fiat system. “Have we ever had a well-run fiat system?” asks Larry White. White responds to Sumner’s deflation concerns by pointing out that the “classical” gold standard of the 19th century was characterized by periods of inflation and deflation that were both moderate, and that even the largest gold demand shocks of the period did not result in unmanageable deflation. The key disconnect between the two economists comes in their vision of what a gold standard would look like—White agrees with Sumner’s critique of a gold standard run by central banks and instead advocates a free banking system without the interference of governments. But White also concedes that we lack the political will to abolish central banks, saying instead that the point of his argument is to help people understand what the benefits of such a system would be.
Should proponents of the gold standard and free banking wait until governments find the political will to abolish their own central banks? Neither debate participant mentions the burgeoning opportunities for individuals to bypass central banks and fiat currency. Bitcoin is just one example of a currency that requires no government backing. Other cryptocurrencies also enabled by blockchain technology, including options specifically backed by gold, are in the works. These currencies and their underlying technology are far from mature. But proponents of free banking and gold-backed money should pay close attention, pushing back against governments regulating these currencies and becoming early adopters when it makes economic sense. Those concerned about the monetary status quo may finally have the opportunity to put their money where their mouth is.