Politicians Push Gold Standard: Have Americans Totally Lost Trust in Our Institutions?
People across the United States are losing trust in the dollar. Georgia, Virginia and 9 other states have considered so-called “Constitutional tender” laws that would require, in at least some cases, that state governments collect and make payments only in gold or silver. South Carolina and Virginia are considering creating their own currencies. Utah legislatorsjust passed a billallowing the use of gold and silver currency.
Animated by doomsday scenarios about crashing currencies and wild hyperinflation, speculators have sent the prices of gold, silver and other precious metals skyrocketing.
At the same time, a growing movement to establish state-chartered banks that could better serve the needs of their communities – and act as “mini-feds” to help stabilize local economies -- is also taking hold across the country.
But what explains this sudden fascination with radically reshaping the contours of a monetary system to which few people gave much thought just a few short years ago?
While the words “In God We Trust” appear on the back of every dollar in circulation, in reality it should read, “In Institutions We Trust.” Our money, after all, is what's known as “fiat currency,” meaning that it's created out of thin air, unmoored from any tangible good. The dollar has value because we believe it has value – we work for green pieces of paper only because we have confidence that we'll be able to exchange those slips for food and shelter and whatever else we need to get by.
That's the way modern economies work, which allows central bankers to respond to turns in the economy by adjusting the money supply. Yet, policy-makers are human, and can err, meaning that we not only have to have a belief in the value of a dollar for the system to work, but also in the competency and motivation of those central bankers. And while they're supposed to be detached technocrats calmly steering our ship through troubled waters, the reality is that the interests of bankers and workers are anything but overlapping.
But the bigger issue is that in the midst of the most painful economic meltdown in generations, trust in the institutions that shape our entire society is in very short supply. A poll conducted last September for the Associated Press found that Americans had become cynical about our major institutions – not one of the 18 institutions pollsters asked about got high marks from a majority of respondents. “Glum and distrusting, a majority of Americans today are very confident in – nobody,” concluded the pollsters.
The Federal Reserve, our privately held version of a central bank, fared even worse in another poll conducted by Gallup in 2009. Asked their opinion of 9 different agencies, the Fed scored the lowest; just 30 percent of respondents rated the job it was doing as “good” or “excellent.” And in December, a Bloomberg poll found that a “majority of Americans are dissatisfied with the nation’s independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright.”
On the right, animated by Glenn Beck's gold-buggery and an abiding belief that government spending is wildly out of control and, as a result, we're headed toward some kind of Mad Max-style dystopian future, anxiety about our most prominent institutions has manifested itself in calls for a return to the gold standard. Georgia's legislation would require the state to pay out and collect funds only in the form of “Pre-1965 silver coins, silver eagles, and gold eagles," which "shall be the exclusive medium which the state shall use to make any payments whatsoever to any person or entity."
Aside from the practical problems – pre-1965 coins are collectors' items, and who wants to carry a bag full of gold down to the tax collector's office every year? – gold, like paper currency has no inherent worth outside of dental fillings and a few industrial processes. It's worth what we believe it to be worth. It's also a commodity, meaning not only that it's ripe for speculation – today's sky-high price of gold is based on little more than speculation – but also would be impacted by the discovery of some big new “motherlode” at a gold mine somewhere in the world.
Then there is the question of how we would transition back to the gold standard in the first place. There are currently something like $9 trillion in dollars circulatingand the entire value of our gold reserves is in the neighborhood of $400 billion. If we were to simply divide our pot of gold by the number of dollars in people's wallets and banking accounts, the result would be a dramatic drop in our purchasing power – we'd be far poorer for it, unless, of course, we happened to be sitting on a bunch of gold.
Recently South Carolina state senator Lee Bright proposed a bill that would approach these issues in a different way. Bright's idea is to establish a commission that would study whether the Palmetto State “should adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve System in the event of a major breakdown of the Federal Reserve System." Virginia's legislature considered a similar proposal in January.
What makes these proposals especially bizarre is that a state-based currency would be backed by the “full faith and credit” of a state government, rather than that of the most powerful nation on the planet. And would one pay for goods and services obtained in other states?
Bright's approach is based on overheated conservative rhetoric about federal spending. The bill claims that “many widely recognized experts predict the inevitable destruction of the Federal Reserve System's currency through hyperinflation in the foreseeable future.” It's unclear to what “experts” the bill refers, but no serious analyst has suggested anything like that happening “in the foreseeable future”; in fact, there's a debate among real experts about whether we're still facing a danger of deflation.
And distrust of the Federal Reserve system isn't limited to gold-bugs and fans of 50 year-old coins on the right. The movement to establish state-based public banks is based on the belief that they can serve the needs of their communities far better than the bloodless, detached and distant bankers who man the helm of the Federal Reserve.
The movement is inspired by the precedent set by the Bank of North Dakota. The bank, established in 1919, weathered the storm of the financial crisis that devastated the rest of the country's financial system. Ellen Brown, author of Web of Debt, points to the success of the nation’s only government-owned bank as the primary reason why last year, “North Dakota had the largest budget surplus it had ever had…and it was the only state that was actually adding jobs when others were losing them.”
North Dakota has an abundance of natural resources, including oil, but as Brown notes, other states that enjoy similar riches were deep in the red. “The sole truly distinguishing feature of North Dakota seems to be that it has managed to avoid the Wall Street credit freeze by owning and operating its own bank.” She adds that the bank serves the community, making “low-interest loans to students, farmers and businesses; underwrit[ing] municipal bonds; and serv[ing] as the state’s 'Mini Fed,' providing liquidity and clearing checks for more than 100 banks around the state.”
Massachusetts, Idaho, Florida and California have all considered proposals to emulate North Dakota since the financial crash. .
These moves – good, bad and ugly – are reflective of a larger sense of uncertainty not only with America's institutions, but also its economy as a whole. Just this week, a Gallup pollfound that a majority of Americans believe that China's economy is the largest in the world. Despite the fact that ours is more than twice the size, less than a third of those polled said the American economy was the global leader.
That's a natural consequence of the “hollowing out” of America's middle class. For decades, we've been exposed to a constant stream of economic triumphalism based on Wall Street's health while our own economic security has been eaten away. Having seen their wages stagnate for years, while taking on an ever-increasing burden for the cost of an education, decent health-care and a dignified retirement, the American people recognize that their position in this supposedly upwardly mobile society has declined, and they're looking for a simple explanation for their pain, be it undocumented immigrants taking all the jobs, the machinations of the Federal Reserve or our departure from the gold standard.
Ultimately, our faith in the dollar is a reflection of our confidence in our country's future – in our military an economic strength, political culture and ability to navigate a rapidly changing world. We can dismiss the gold-bugs as crazies, and point out that the state bank movement isn't a magic bullet for our deeply entrenched economic problems, but the fact that so many Americans no longer trust the fundamental strengths of American society is itself a real and troubling phenomenon.