A Different Kind of Gold Standard

A Different Kind of Gold Standard

April 5, 2009


Under the hood, all gold standards are the same. There has to be some sort of mechanism to adjust the currency base money in response to currency value, to keep the currency’s value in line with gold. However, there are a lot of different mechanisms you could use to accomplish this basic function. I was talking to a friend who suggested a little different type of system. I think the elements of his system are, for subtle reasons, more acceptable to people today.

It’s like you’re teaching people how to swim, and you want people to get in the pool. You discover that they are more willing to get in the pool if you make the pool rose-scented, because they have some sort of positive, comfortable feeling associated with rose scent. The rose scent is irrelevant, but if it helps why not.

My friend suggested that the first step would be for governments to issue gold-linked bonds. Governments do this already, in the form of foreign-currency linked bonds (Brazil’s dollar-linked bonds), or CPI-linked bonds (“inflation-protected”). You say: “principal and interest will be paid in dollars, but in an amount linked to the dollar price of gold on the day of payment.” If someone wants gold bullion instead of dollars, then they can purchase a forward delivery contract from a gold miner for the day of bond maturity. The borrower is happy, because the value of their investment is being protected. The issuer is happy because the interest rate is probably lower. The U.S. government could even swap bonds with China: “OK, you don’t like our Treasury bonds, so I’ll tell you what. We’ll issue these gold-linked bonds and trade you for your regular bonds.”

Now, we make the dollar (the currency) redeemable for gold-linked bonds on demand. If you have $1000, you can trade it for a $1000 10-year gold-linked Treasury bond. This introduces the supply-adjustment process that is necessary for a gold standard. You would have to specify a gold parity value, for example $800/oz. If there are too many dollars out there, people will redeem them for bonds, and enjoy the interest income. The supply of base money contracts.

Now, this system isn’t foolproof. For example, what if the currency manager was systematically overissuing currency? At first, the currency would come back in trade for gold-linked bonds. However, it wouldn’t be too long before people started to suspect that government that is eager to overissue currency (i.e., devalue the currency) is also one that might not abide by its promise to deliver something gold-equivalent in ten years. There is a rather ugly history, in the Americas, of governments issuing notes that promised delivery of gold or silver at some time in the future. I mention this in my book. The colony of Massachussets, for example, paid its workers in paper that was supposed to entitle the recipient to delivery in silver at some future date. However, as the state issued more and more of this paper, people doubted that they would ever be paid in silver (they were right). Thus, the value of the “silver-linked bonds” fell in the open market.

This illustrates the second principle of all gold standards: there is no ultimate remedy for a government that is either incompetent or wants to devalue/mess with/overissue the currency. No gold standard in all of history has been government-proof. Thus, our list of requisites increases to two:

1) There must be some system for managing base money to keep the value of the currency in line with gold; and

2) Governments have to actually want to abide by the rules and principles of the system.

Thus, this system is more of a thought exercise than anything. It helps get people in the pool so they can learn how to swim. Among thought exercises, it has some interesting qualitites. It gets people out of the idea that they have to own bullion. I’ve said over and over that it is not necessary to own bullion to have a gold standard system. Indeed, it is only when you know how to operate a gold standard system without bullion — in other words, when you have mastered the supply adjustment process — that you can run a system whether it has bullion or not. The bullion becomes irrelevant.

In this system, when there is an excess of currency, the currency manager sells gold-linked Treasury bonds and takes base money in return, reducing the outstanding supply of base money. Note that this is almost identical to a system in which the currency manager sells Treasury bonds that are not explicitly gold linked (although they would have an implied gold link because the currency is gold-linked) and takes base money in return, reducing the outstanding supply of base money. Do you see what I mean about a rose-scented swimming pool?

What will actually happen is:

1) The currency manager will understand the supply adjustment process,

2) The currency manager will want to abide by the system to keep the value of the currency in line with gold;

3) As a result, the currency manager will take whatever gold standard system he happens to have and make it work. Because, at the end of the day, the system is just an excuse to properly manage the supply of money, in accordance with a gold parity.

* * *

A reader asks:

I’ve thoroughly enjoyed your series of posts relating to urban design and the need for greater economy in such matters. However, I think it would be great for you to explore further the dynamics as to why modern cities offer poor utilization of land and tend to towards urban sprawl — certainly there are underlying economics factors that have pushed urban development towards the inefficient and hideous sprawling mess that is commonplace.

Namely, I’m thinking of how taxation and regulation has probably been a determinant factor in how cities grow and make use of space. There is a Canadian economist by the name of Lawrence Solomon who has done a great deal of serious thinking and research on the matter, and he provides some great examples of how taxation and regulation within municipalities has greatly shaped urban land use and development patterns. I’ve posted a link to one of his articles below, would appreciate some of your thoughts (perhaps in a future NWE article);



“Urban planning” (as opposed to City Design) is one of the great bastions of top-down Soviet-style central government planning in the U.S. economy. Others have written about the effects of such things as zoning, and all the various regulations regarding lot size, density, building type, purpose, on all the way down to the housing association level where they will bust your ass if you don’t mow the lawn that you own, or have the temerity to line-dry your socks. Of course, my personal interest in street width and layout is something that falls almost completely within the purvey of the not-very-talented people found in local governments.

Taxation is more subtle. Typically, there isn’t all that much difference in taxation at the city level, although sometimes you’ll see an effect due to differing property tax rates. Do you know why Greenwich, Connecticut is such a popular suburb with the banking upper class of New York? It is the first town you hit in the state of Connecticut, as you come from New York on the train. Until the early 1990s, Connecticut didn’t have a state income tax, unlike the very high taxes of New York state, upon which the even higher taxes of New York City are piled. I’ve often thought that an interesting solution for New York City would be to eliminate all city income taxes, and ideally state taxes as well. Then, people wouldn’t be incentivized to make long commutes, and a lot more upper-middle-class families would try living in Queens, which is where you are supposed to live if you work in Manhattan. If that was the case, the area would quickly gentrify, and it would probably become rather nice.

I bring up New York City, because a lot of what has happened was really developed in New York. New Yorkers sort of pioneered the long-commute-from-the-exurbs format, and since New York is the center of U.S. media, this ideal has been subtly injected into all sorts of advertising images.

Want to see what I mean? Let’s take a look at the Pottery Barn catalog. No, really.

Pottery Barn sofas

Pottery Barn beds

Pottery Barn kitchen and dining

Pottery Barn outdoor furniture

Look at the whole layout. What do you see? See the wood floors, the frame windows, the sorta-antiquey furniture? Look out the window. Do you see the Arizona desert? Look at the size of the rooms. These are big rooms. Look at the outside shots. See the ocean? It is not the Pacific Ocean, with huge sand beaches and big surf. It is not even the Jersey shore, North Carolina, Florida or Maine. To my eyes, it has a certain Long Island Sound look to it. See the grass everywhere? Where does grass grow? (Hint: not San Diego.)

Let me tell you where this comes from. It comes from Fairfield County, Connecticut, specifically Westport.

Why Westport? Because it’s a popular town with New York advertising people.

I lived in Westport for three years. I know the look.

If you think I’m making this up: I recently read a book by a New York advertising guy who lived in Westport. It was published in 1955 — when postwar suburbia was just catching fire.

buy The Exurbanites from Alibris

And that’s what HE said: the look you’ll find in the national advertising comes from Westport, CT. Which just happens to be the home, 54 years later, of Martha Stewart.

And that is why, when someone wants to build a McMansion in Phoenix, it has wood floors and frame windows, and a view of an expanse of grass.

There is something else inherent in the Pottery Barn fantasy. Lots of land, which you can see out the window. This implies living out in the country. Westport, CT is 42 miles from New York City. So, when you see the photo of the 4000sf McMansion with the three-acre yard, you are also being sold on a mega-commute.


So, to get back at your question, I think regulation most certainly has an effect, but ultimately it is a question of vision. What is it that people think is good and proper — so important that they will make every sacrifice and every effort to obtain it? Even to make a wooden ersatz-colonial house with a lawn in Phoenix, a place with no wood and no grass and no colonial history? It’s the picture in their head that’s most important. Why do you think I’ve been showing you so many pictures?

This “picture in the head” gets ossified into various rules and regulations, which basically makes it impossible to make anything or do anything that doesn’t fit the picture in the head. Property developers soon find that to deviate from the rules and regulations is extremely problematic and possibly expensive, while it is very easy to just do things the same way over and over. House buyers never get to see anything except that which is allowed by the rules and regulations, so they make do with what’s available.

The insanity has reached such a level that people in places like China and Kazakhstan (I once met a property developer from Kazakhstan) are now building suburban developments that look rather spookily like … Westport, CT.

By the way, the guy who lived in Westport in 1955 moved back to the City, concluding that the reality of suburban living — even in its idealized state — kinda sucked.


But, it is not just a Connecticut thing. It is an American thing, dating back to colonial times. I’ll have something about this soon. The suburbs are really a sort of traditional American design — a rural design — that was strangely suitable for automobiles (although it predates automobiles by about 120 years). It was the melding of this longer American history with the automobile that made the post-1950 automobile suburb. Thus, we really have to get off the continent to find alternatives, and that’s why I spend so much time poking around Europe and Asia. When every American is stuck sitting in traffic, they start to daydream about some sort of agrarian 19th century lifestyle. Jim Kunstler does it constantly. The problem is, the suburb today is a 19th century design, plus cars.