Gold's Past and the Future of Money

Matthew Bishop and Michael Green – authors of The Road from Ruin – have a new book out, In Gold We Trust available from The Economist and you can get it from Amazon on Kindle or iPad here. To read the title you’d think that two serious and well-informed writers on the economy have signed up for Ron Paul’s End the Fed campaign and transformed into born again gold bugs, fleeing paper currency for all that glitters and advocating a return to the gold standard.

No one can ignore the meteoric (inflationary?) rise in the price of gold since the financial crisis in 2008. Fortunately, the sub-title is perhaps more to what the book is about: The Future of Money in an Age of Uncertainty. Having just finished it, however, I can understand both the compelling logic but more the real risks of moving everything into GLD (an ETF called SPDR® Gold Shares). Anyone who is thinking about gold should read this book, but everyone who cares about the economy, monetary policies, and the future of money, should also read it.  Not born again gold bugs, then, but, having walked the Road from Ruin since 2008, the writers have an abiding concern about the political competence of today’s nation states to manage monetary policies in a way that takes their real challenges seriously.

But first, they take us for a delightful walk through the ages (helps us to see our current pain in perspective), reminding us that for centuries silver was more important than gold in the history of money, the word shekel coming to mean silver. And how wars and other trauma all too frequently made institutions break their promise to render to the bearer the metal the paper represented.

I for one did not know that Sir Isaac Newton was instrumental to helping the British mint mill the circumference of coins to prevent ‘clipping’ of silver, eroding and debasing the currency, and how the Civil War in the states was paid for by printing massive numbers of ‘greenbacks’ which took edicts from congress to enforce, hence the expression ‘fiat money’, money backed by the promise of governments.

Less a golden age of gold back currencies, gold’s history is one of happenstance and accident. Expensive European wars led to the curious circumstance of America having most of the world’s gold after the second war and, in keeping with human nature, unwilling, at Bretton Woods, to engage in Keynes’ universal scheme of using a ‘bancor’ a ‘supranational’ money. America had all the gold marbles, used this leverage to become the worlds’ reserve currency, and even after going off the gold standard in the early-seventies, continued to ‘spend, spend, spend’ as if the dollar was still gold. We know how the story ends, America the world’s bank devolving creditor to debtor in quick order. Actions have consequences, the writers tell us, and despite huffy protests, perhaps there was good reason for the downgrade from AAA to AA for US debt.

China and the IMF, of late, have resurrected the notion of the Bancor, but the authors of In Gold We Trust suggest there might be a better and smarter way, one pioneered or at least hinted at by the bitcoin organization. Digital money kept good and honest, unclipped and fair, by technologies that would be immune to wars, monetary policy whiplash, and commodity price fluctuation, a kind of peer to peer bit torrent barter exchange. What could possibly go wrong? (You can find the current bug list here, use your imagination…)

No easy answers. Nothing really to help Glenn Beck and Ron Paul (although the absolutely best thing the authors could do for book sales is get Glenn Beck to denounce it on air). Virtual money is a long ways away, one fears (I couldn’t use my Skyrim virtual gold to buy the book on Amazon for example, $USD worked though :-).  And political and monetary self-interest will mean a latter day ‘bancor’, digital or otherwise, is still a distant dream.