Dr. P.V. Viswanath
Comments on a Gold Standard
© P.V. Viswanath, 2005
Historically, there has been very little inflation for the longest time period; more recently, though, there's been much more inflation, including periods of high inflation. Wanniski connects this increase in inflation to fiat money. (See Exhibits 3.5 and 3.6 in Shapiro's Multinational Financial Management.)
What is inflation? Robert Mundell defined inflation as "a decline in the monetary standard." This is different from a rising price index because price indices could rise for reasons other than a decline in the value of the monetary standard, viz. for real reasons as well.
Just as the Polaris is valuable as a reference point because its location is invariant with respect to different perspectives -- it's always in the "same" place, so also it's important to have a monetary standard that has the least wobble. This can be gold in our case because as our book tells us, gold is difficult to produce; hence central banks and governments cannot increase its supply. The demand for most things, including gold is relatively stable over time. (There is also demand for the standard induced by its status as the standard. What do we make of this? This could vary over time, but its effect wil probably be less than using fiat money as a standard.)
An aside on inflation and morality
Especially, today, when the supply of money is undefined (due to the efficiencies of the payments system -- credit cards, etc.), the value of a unit of fiat money is undefined. On the other hand, using a gold based unit of value denomination would make it easier to cut the connection between the unit of denomination (measure of value) and the means of payment.
A relatively stable monetary standard also avoids things like the creeping income tax bracket. Nominal contracts will have more integrity.
One could argue that an "artificial" scarcity of the means of payment could throttle economic activity. But is this relevant, now, in the age of credit cards and e-money? (However, this is not an argument that even needs to be made, if monetary policy is not tied to the amount of gold in the country's reserves (i.e. exchangeability), but rather to the price of gold. Thus, if there is a scarcity of the means of payment, the price of gold would drop, since dollars would become more valuable. This would, in turn, require the Fed to increase the supply of money. In any case, this is less likely to happen since the Fed no longer has a monopoly on the means of payment.
Currency Values and the Social Contract
Wanniski does realize that money is used as currency, as well as a store
of value -- that is, as a means of payment. As such, the demand for money
can be higher or lower. That is why instead of considering a one-for-one
relation between the amount of gold in reserve and the amount of dollar
bills in circulation, what he recommends is maintaining the price of gold
constant. If we assume that the supply and demand for gold is relatively
stable, then keeping the dollar price of gold constant is equivalent to
keeping the gold price of the dollar constant. Using this sort of a "
The biggest problem that he has with other sorts of standards to maintain the integrity of the monetary standard is that they are too opaque. That's why people have to be trying to figure out what's happened at the Federal Open Market Committee's meetings. Here's what he writes, in very clear and commensensical words: