Commentary Type

Book Review: The Long—and Dangerous—American Path Paved in Gold

Simon Johnson (PIIE)


What is gold? Is it the essential bedrock of fiscal prudence? Is it a political football, with fortunes and importance determined by far greater forces? Or is it a mere distraction at the margins of the global financial system—attracting a disproportionate number of scams and oddball political characters?

Gold in the American economic system has been all of these and in that order. James Ledbetter weaves a highly readable tale, literally from the origins of the republic to the dubious sponsors of Glenn Beck on Fox News (a brilliant concluding chapter). Too often, this kind of economic history becomes dry and even soporific. But Ledbetter—the editor of Inc. magazine—has a fine eye for personality and ideas; each of the 12 chapters puts you on the spot at a critical moment on the American journey with gold, with anecdotes nicely blended to create the broader historical context.

You can read it in chronological order or you can dip a toe in at any point, almost the ideal summer reading. Or—my favorite for this kind of tale—watch the story unfold backwards; start with the modern and familiar, and see how far you need to go back in time before it feels like you are watching something straight out of Marvel Comics, with big characters and motivations that now seem strange. The most compelling material explains how President Franklin D. Roosevelt reluctantly yet effectively—and with very good reason—ended the way gold had operated over the previous half century. But Operation Goldfinger is also highly entertaining—a 1960s public policy escapade, inspired by the James Bond movie.

The broader plot line is this. The American republic was initially bankrupt, a point that the hit musical Hamilton made more effectively than any middle school history lesson. A monetary system subsequently modeled on that of Britain included gold as an anchor of value for paper money and bank deposits. This system provided sufficient stability in good times—along with plenty of opportunity for financial speculation and shenanigans—and could also be suspended when circumstances dictated, most notably during the Civil War.

At the end of the 19th century there was a fascinating, prolonged and only-in-America fight over the extent to which a gold standard was still helpful for prosperity—accompanied by the book "The Wonderful Wizard of Oz," one of the most loved (if now misunderstood) pieces of political propaganda ever. Dorothy from the prairie, her populist companions, and the magician of ounces (abbreviated: Oz) of gold all resonated with people following contemporary politics—although modern experts still argue about the precise point L. Frank Baum was trying to make. The pro-gold side eventually won—only to see the basis of their beloved system undermined and eventually swept away by the global impact of World War I and the Great Depression.

From the ashes rose a very clever post-World War II mix of gold and U.S. dollars as the basis for international trade. This American-designed and supervised scheme worked well for rebuilding Europe and boosting U.S. exports, but could not handle the international pressures that developed during the 1960s. As countries' exports recovered, they built up their reserves of dollars—and their claims on gold held by the Federal Reserve. This system could last only as long as European countries were willing to hold dollars, and loose American macroeconomic policy undermined the perception of stable dollar value. When pressed in 1971 to maintain the value of the dollar relative to gold at the cost of potentially creating a recession that could jeopardize his reelection, Richard Nixon did not hesitate. The official link between the dollar and gold was broken, and the American global system was finished.

Except that it wasn't. In retrospect, foreigners held a small amount of dollar assets in 1971, relative to the size of our economy. Now they hold much more—including perhaps around half of all federal government debt outstanding. When the going gets tough, the tough like to hold—U.S. government bonds. Gold has slipped into irrelevance. The Great American Secret to Economic Success has never been that we have more gold or treat it with greater respect. Instead, our advantage over 200 years is that we are a flexible and innovative people, with grand ideas and a particular taste for the risks involved in applying science to new business endeavors. In all of human history, there has never been a place so good at absorbing immigrants and ensuring that they and their children become productive. But, most of all, we constrain executive power, we honor our federal government obligations, and we put very little restriction on what you can do with your dollars. Plus the rest of the world is consistently more messed up—today, and likely forever.

While not claiming to be comprehensive, Ledbetter catches all the main themes and, through the lens of gold, brings our latest predicament into clearer focus. From the 1960s, the American right-wing regained prominence in part on the back of arguing that a system without gold was completely dysfunctional and likely also immoral. In their view, without an auric anchor, bureaucrats and politicians will find sneaky ways to reduce the value of the dollar in your pocket. Under Ronald Reagan, there was even a high profile Gold Commission, with the goal of establishing whether gold should resume its historical role. At the critical moment, the defeat of inflation—led by Paul Volcker, as chairman of the Federal Reserve—made the gold issue finally moot.

And yet the gold lobby continues to fight, including in alliance with many of the people who support President Donald Trump. The Republican-led House Financial Services Committee has, of late, argued strongly for restrictions on what the Federal Reserve can do—harking back to rules that prevailed under the gold standard. The quasi-goldbugs have a more complete grip on power than at any time since 1932.

Theirs is an appeal to supposedly traditional values—and Ledbetter is right that gold still lingers in this sense within the popular imagination. But the truth is that all our most important established rules and institutions—the true basis for our modern prosperity—are now seriously at risk. The distorted memory of gold may yet ruin us all.

How One Precious Metal Has Dominated the American Imagination for Four Centuries

By James Ledbetter
Liveright. 380 pp. $28.95

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