CoinWeek Podcast #60: George Selgin on the Gold Standard, Bi-Metalism, and Failed Banks

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Gorge Selgin is a senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and Professor Emeritus of Economics at the University of Georgia. A co-founder of the Modern Free Banking School, Selgin is an economic researcher and theorist, whose work on money and regulation touches upon matters of coinage, specie and government regulation of money and banks. He joins me for this very special episode of the CoinWeek Podcast to talk about the gold standard, free silver, and America’s busted banking system.

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The following is a transcript of Charles and Dr. Selgin’s discussion:

Charles Morgan: Hi George, thanks for joining me on the CoinWeek Podcast.

George Selgin: Oh, thank you Charles. It’s a pleasure.

CM: One of the things that I think coin collectors are generally interested in but do not understand at the level that you would or an economist would is the gold standard. What exactly was the gold standard and how was it implemented in the United States?

GS: Oh, actually those aren’t simple questions, so I’m happy to answer them and I think there’s a lot of misconceptions around about them. The gold standard has actually meant rather different things at different times, in general, but specifically in U.S. history. What it originally meant, in general, is a system where the ultimate form of money consisted of gold coins themselves and some bullion for larger transactions, and where every other kind of money in use, particularly paper notes issued by notes, consisted of IOUs; that is, these were representatives of gold that were redeemable in gold, or they were supposed to be, and of course if a bank didn’t redeem its IOUs – paper or otherwise – it was declared to have failed and it was closed… so that is what a gold standard meant.

The meaning changed in a very fundamental way as governments became more and more involved in issuing paper currency and at some point, when they took it over completely, instead of it being a contractual matter that the paper currency represented so many ounces of gold – it changed to being a policy matter – that is, it was a policy of governments and their agents, including central banks, to uphold the gold standard, by honoring this value of their currency.

Why does it matter, whether it’s contract or policy? It matters a great deal, because, as I mentioned before, if it was a matter of contract, a bank that dishonored it was shut down if it defaulted. Whereas with central banks, when they got in charge, as we now know, of course, they could stop paying gold with impunity, they could even announce a devaluation and they would stay in business, they would remain ongoing businesses – that is one of the important changes in the meaning of the gold standard that happened historically, that people often overlook.

So that’s part of the question of what is a gold standard and part of why there is more than one answer. The other thing, specifically referring to the United States, that I wanted to emphasize, is that we have not actually been on a gold standard, that is, we were not on a gold standard for all that long in the United States. Officially, in fact, the United States did not have a gold standard, in the strict sense, until 1900. Unofficially, we had a gold standard between 1879 and the 1930s, but officially, we did not go on a gold standard until 1900, and the reason for that is because officially, we were on a bimetallic standard, so-called, before 1900, meaning that the dollar was defined both in terms of gold and in terms of silver until that date.

What happened, though, is that after the great gold discoveries of the 1840s, gold became less valuable than it had been relative to silver, consequently given the bi-metallic policies in place, gold was officially overvalued at the mint and that meant that people brought gold to the mint to have it coined, but they didn’t bring silver anymore, because it was legally undervalued – so the only actual coins being produced – and again this is after 1879 because between 1863 and 1879 we were on the Greenback standard, because the Civil War caused a suspension of gold payments – but anyway, once we resumed in 1879, only gold came to the U.S. Mint to be coined and effectively, but not still officially, we were on a gold standard.

Officially, again, we got on a gold standard in 1900. In the 1930s, of course, the Fed stopped converting dollars into gold, so domestically we went off the gold standard. But even then, we didn’t quite have the gold standard go away completely, because the Fed continued afterwards to convert dollars into gold for foreign central banks, albeit at a devalued rate for the dollar. And that arrangement, in one form or another, continued until 1971 when the last link between gold and the dollar was broken by Nixon’s closing of the so-called “Gold Window”.

So there in a nutshell is the story of the gold standard.

If I could add just one more detail, Charles, it’s also the case that most countries went off the gold standard in World War I. So, another big change I should mention is that before World War I, whereas before World War I, our U.S. gold standard was part of an international gold standard called the “Classical Gold Standard”. During and after World War I, things were never the same and although some countries did resume gold payments after World War I that had suspended them during the war, we never quite recreated the same kind of gold standard arrangement internationally that we had before the war.

CM: I’m going to put forward a premise or understanding, and you can either corroborate this or disabuse me of this notion. The first is that – and I’m going to go back to the big fight between the gold bugs and the silverites that dominated American politics for several decades at the end of the 19th and beginning of the 20th century. It seems to me that one of the arguments that went back and forth was that silver was an inflationary currency and gold was a deflationary currency. But I wonder, in a contemporary context, do we today understand inflation and deflation as these conditions would have manifested in an economy backed by these metals?

GS: Things haven’t changed so much in the sense that we can understand what that debate was all about in terms of our modern understanding of the terms deflation and inflation, because it boiled down, I think, to this, that under the gold standard, which was, of course, was the actual standard, unofficially, when these debates were raging, it’s true that prices were tending to fall. So we had deflation, in the same sense that we understand that notion today. Prices were falling in a fairly gentle rate overall. However, in some sectors – and agriculture was one of them – they were falling more rapidly, and this is why the farmers, particularly, perceived the gold standard as something disadvantageous to them, and that was informing the populist sentiments in favor of making the silver standard function again, and I’ll explain in a moment exactly in what sense silver had been already officially demonetized.

But they were not only arguing for the restoration of a true silver standard, which they believed would result in less deflation. They were also, many of them, pleading for the government to issue more paper money in the form of those Greenbacks that were first issued during the Civil War. And again, they wanted more inflation, but it wasn’t in the same sense that we would think of it today. They wanted prices, if not to rise, but at least not to fall as much, particularly in their sector of the economy as was actually happening in the gold standard.

The particular thing that incensed the silverites was what they called, famously, the “Crime of 1873”. And the funny thing about the “Crime of 1873”, so-called, is that nobody called it that and hardly anybody even noticed that it happened at the time, but it became the big issue around which the silverites rallied in the 1890s with William Jennings Bryan as their representative. What actually happened in 1873, as you might… as you probably know, is that silver had been legally undervalued at that time. In fact, of course, we were on a greenback standard so it didn’t really matter, nobody was bringing silver to the mint anyway.

However, in that year, the Mint struck silver dollars off of the list of coins that it was willing to make; in other words, it quietly demonetized silver, but nobody really noticed it at that time. Then in the 1890s, effectively, what happened was people realized that had that not been done, the decline in silver’s market value by then, meant that silver would have started coming back to the mint – only it didn’t because they took it off the list, as it were. And that’s when people said, “Wait a minute! This thing that happened quietly in 1873 was a “crime” because if it hadn’t we might be getting our silver standard back automatically now.” And of course, they pleaded for the government to take steps to make that happen… and lost.

CM: So, in this case, and if you are not a coin collector or a student of this – you are probably well aware that in more recent years, the government tried to circulate a dollar coin and they were not accepted by the public, there was no demand for them, because of $1 Federal Reserve Notes and probably because people don’t want $1 coins jingling around in their pockets, so the Treasury is stock full of golden dollar coins, which are not made of gold but are gold in color. In 1878 and onward, the United States Mint, compelled by Congress, because of the discovery of the Comstock Lode, a huge cache of underground silver, and with the direct influence of western mining interests, struck hundreds of millions of silver dollar coins that nobody wanted. Due to the falling price of silver, these dollar coins were basically fiat money with a $1 face value and much less value in silver content. So in this example, like with the modern dollar coin, you have an instance where government interference in the monetary policy created a product that the market did not want.

GS: Well, that’s right. You see, I have to explain because it sounds like we have a contradiction, but we haven’t. The mint was not opened for the coining of silver bullion as it once had been prior to 1873, otherwise, those Comstock discoveries would have led to people bringing bullion to the mint to strike full-bodied dollar coins, which would have been worth a dollar of silver.

But that didn’t happen, of course. But what did happen as a sort of compromise, or sop to the silver interests, the government itself bought silver and coined these coins you refer to on its own account, which it called dollars but which in fact had a lot less than a dollar’s worth of silver, so they kind of resembled moderns coins in that respect, in being worth a lot more nominally than the value they represented. And what the government did in fact do was stockpile these coins… and the point is, we didn’t really have a monetary reform there. You had essentially a way to make the silver miners happy, the silver interests happy… but it didn’t do much for the farmers as a genuine free coinage of silver might have done.

And what’s interesting about that story, which again, made the miners happy but not anybody else, is that’s exactly what the United States Mint has done, not just in its recent effort to mint metallic coins but also in its earlier efforts to do the same.

Both of which involved two… an un-cynical person would say two mistakes. A cynical person would say two devices that would insure that the coins would never circulate: the coins were too similar in size to quarters, that was one point; and the other is, of course, that the government never demonetized paper dollars, which the public tended to prefer anyway. So all of these dollar coins ended up piling up at the Mint but of course, if the mining industries, this time not silver, but less precious metal mining industries, if the intent was to help them, then the policy worked like a charm. And I believe that really, those really were the intended beneficiaries of the recent dollar coinage attempts. They are also the main beneficiaries of the government’s insistence on maintaining pennies as part of our currency, even though most of them just pile up in our dresser drawers or in our piggy banks, instead of actually being used.

CM: So, we’ve laid out the case of the silver dollars – the Morgan dollar period silver dollars. I wanted to talk about gold a little bit. There have been a number of gold booms in U.S. history. There was in your old stomping grounds as a Professor of Economics at the University of Georgia, there was the Dahlonega Mint and the Charlotte Mint, created to coin gold that was extracted from lands that so happened to be occupied – lived on – by Cherokee Indian tribes – until Andrew Jackson and others forced them to vacate the territory so that the gold could be mined and the land could be developed by Americans.

There was also a much bigger deposit of gold was discovered in 1848/1849 in California and what we see economically develop in California is very interesting, is that it sort of plays against the idea that gold is deflationary. When gold was discovered, essentially everybody who goes to find their fortune prospecting for gold, the cost of anything one would want to purchase skyrockets in California because gold has become so plentiful that people selling provisions, lodgings, companionship are eager to take gold out of the hands of prospectors. So, in that situation, you see an imbalance of the scarcity of metal, its supposed value, and how it led to a very inflationary period of pricing. I would argue that California is still somewhat affected by this inflationary element, as the real estate value of land in California and the cost of goods in the state remains out of alignment with the rest of the country.

GS: Yes, So, two things that are going on in California, and in the country, in the 1840s and 1850s. First of all, bear in mind that gold became deflationary later on. At that time, the gold discoveries were, of course, not deflationary either in California nor for the rest of the country. They were not all that inflationary for the whole country, however. If you look at statistics, you don’t see much of an increase in prices all around. What you do see is that a previous bout of deflation comes to an end as a result of these discoveries. So they kind of make up for it.

And that’s not a coincidence.

What happens is if gold has been getting more valuable, the prospecting activity goes up and in a sense, the actual discovery at Sutter’s Mill was itself fortuitous. People were looking, of course. And they were looking because the value of gold had risen. Anyway, in California itself, as you said, the inflation was much more considerable.

That is actually a result of two things: it is a result of the increase of the quantity of gold, of course – which by the way, at first, they don’t know what to do with it except mint it locally, because they don’t want to risk sending it all the way to the East Coast where all the official mints were. So you get all of these cool private mints… I’m sure some of your listeners have collected some of the gold coins they produced. Many of which are quite nice, and even better in gold content, than the official stuff at the time. You had that, and you also had of course the tremendous influx of people coming into California, in part to prospect and look for gold, but also to take advantage of the activity in mining, to produce ancillary goods and services for the industry. And that is, of course, creating all kinds of booms in California that are independent on the quantity of gold.

It’s a general increase in the demand for real estate, services, goods in California, compared to the rest of the country. Much like what’s been happening more recently. So there’s a greater money supply, but there is also, independent of that, what you might call a higher velocity of money because of all of the people going in there, both contributing to an extraordinary demand for goods and services and land in that part of the country. And you are right, it doesn’t seem to have stopped!

CM: I think about the allure of gold and how it drove European colonialism, both the classic period of colonialism, where the New World is discovered and Christopher Columbus was looking for gold here after he landed and discovered the indigenous people he encountered had it and the Spanish crown wanted gold extraction – which was a principle reason why they funded the expeditions. And also the second, the late 19th and early 20th century era of colonialism into Africa, it seems to me that gold and the allure and desire to have it has both a mercantilist element for the countries extracting and trading in it and also a high social cost for those on whose land this gold is discovered. How do we adapt our thinking to a reacceptance of the gold standard and not repeat these mistakes?

GS: Well, um, I might surprise you and your listeners that I’m not one of those people who think our best bet is to go back to a gold standard. However, the plain truth is, that if what you’re worried about, or what your concerned is the amount of effort, and cost, and other consequences associated with a lot of gold mining activity… your best way of minimizing those, and this I can affirm with statistics all you like, the best way to have fewer resources going into gold is to have a gold standard. Not a primitive gold standard, but an advanced gold standard where banks are issuing good substitutes for gold, because what that means is that people, at least for their monetary purposes, have all these close substitutes for gold, they are redeemable in gold, they are worth the same amount, they are more practical in circulation. And of course, if everything is working well, they retain their value as well as gold itself.
There’s no such thing as a demand for gold itself as an inflation hedge in a gold standard situation, because plain old money will do. That is, the claim is redeemable.
To be more direct about it, the amount of effort that goes into and the amount of adverse consequences associated with the mining of gold – social, environmental, and otherwise – are related to how high gold’s market price is – that is in real terms, in inflation-adjusted terms. Well, you can look at the record, since we abandoned the gold standard we have had, in general, a far higher real price of gold than we had before, and more effort going into those industries than before, and more adverse consequences, of course, we don’t have slavery anymore and we don’t have some of the other terrible consequences, like driving Indians off of their land, but we do have environmental consequences and other bad stuff.

That’s been going on more than ever under our modern fiat money systems and that’s because in those systems people have more reason to worry about their ordinary currency losing value over time and to seek gold as an alternative way to store value, as they do to a very considerable extent in certain countries abroad, like India. But as even central bankers do by being notorious gold hoarders – they are hedging against their own misconduct as it were – so that the actual truth of the matter is that a gold standard, at least a historical sort of gold standard that we had, where you had banks producing close substitutes that people mostly relied on, is a means for economizing for the demand of gold, rather than something that tends to enhance that demand.

So if you want to have less gold mining, by gosh, you have to be a gold bug. It’s one of the sounder arguments for seeing the restoration of gold. Like I said, I think there’re reasons, plenty of them, for not thinking that that’s what we should look forward to, or try to implement… and I don’t speak for most libertarians, of course, when I say that. But that cost savings is not a reason for avoiding a gold standard. We would have less gold mining with a good gold standard, especially an international one, than we do now.

CM: I would like to get on to your thoughts on Free Banking, Modern Free Banking, which I know that you advocate for, in a minute, but first, you did bring up a curious phrase and I’d like you to expound upon it. Why is it that central banks, if they are producing fiat currency and running a global economy on it, why do they hoard gold or, as some people believe, can manipulate gold prices? Why is that they are such aggressive buyers and stockpilers of gold, if they no longer believe in a gold standard or a gold monetary system?

GS: I’m afraid, Charles, you’ve got me there. I don’t think anybody really knows. And of course, I can’t get into the heads of the central bankers themselves, who have never really, as far as I know, they have never really individually, or much less as a group, explained why they persist in holding gold in their portfolios and in some cases, a lot of it. I cannot think, personally, of a good reason why they should do so as a matter of meeting their responsibilities. So, I don’t know the answer. I doubt they could give you a good answer. And that’s all I can do on that one. I’m sorry.

CM: I recall many years ago, sitting in a high school civics class and perhaps a very liberal teacher I had at the time suggested that one of the strategic reasons why the United States shouldn’t drill for oil in ANWR was because if oil ran out elsewhere and wasn’t available elsewhere and there was a great national emergency or need for it, that you would have as reserves this stockpile. And perhaps that’s a little simplistic as it would take many years and the construction of tremendous infrastructure to extract oil from such a remote and harsh climate – but I think about the central banks holding gold – as you said earlier, as a safe guard against their own bad behavior – it seems to me that if a country was in a great period of national emergency and needed support, goods, allies, or whatever you would want to call it, and their money was collapsing or under threat… I remember how during World War I Germany was trying to collapse the Indian rupee to hurt Great Britain, so economic warfare is always a major part of warfare… at least with real gold reserves is that you can, under duress, continue to buy friends or favors with it, at least for a while.

GS: The problem with that argument, though, and the reason why it is not analogous to stockpiling oil… The main cause of depreciation of any central bank’s money is itself. It’s true that there have been efforts by foreign governments to replicate other central bank’s moneys via counterfeits and ruin them that way – there are economic warfare stories out there, there’s truth to them, don’t get me wrong – but nothing beats a central bank’s own misconduct for ruining its currency. As much as the Germans tried in World War II to ruin the British crown, let’s remember whose currency they ultimately ruined, it was their own, the Reichsmark. And boy did they do a good job at that. And they didn’t have to fake them, either; they just had to keep on printing too many of the real things.

And so, having gold for the rest of us is good protection against the central banks’ misconduct, but as far as central banks themselves are concerned, having gold speaks to their own, let’s say, lack of confidence in their own abilities to maintain their currencies’ values, more than anything else. And of course, if currencies depreciate, including their own, gold does tend to go up in value, so they would have a capital gain. And, as such, they would be acting as successful hedge funds. They wouldn’t be acting as successful central banks doing what they are supposed to do.

CM: So what brought about, in your opinion, the collapse of the Gold Standard as we know it? Why did it all fall apart?

GS: World War I. In a word. To elaborate, most of the countries that were on the gold standard at the outbreak of the war, of course they were belligerents in the war. They all got off the gold standard, you might say, that, of course, the fear that they were going to get off forced them off. But in the end, it was a fiscal thing. They thought getting off the gold standard allowed them to engage in paper money finance as part of their effort to pay for the war. And this is an old story with governments, money, and war.

The U.S. didn’t go off completely, although it did limit gold shipments abroad. So you might say internationally, it did have semi-suspension of gold payments. Ok, so that ended the gold standard for the time being.

However, what happened after the war, in their efforts to try and restore the gold standard, the various governments, basically, tried to jerry-rig things. Because the most obvious way to restore the pre-war gold standard would have been to undo all the money creation that the belligerents took part in during the war, which would have meant deflating prices that had been increased dramatically in some cases, during and immediately after the war, and then restoring the old gold values of their currencies. Well, that was a very, very difficult proposition.

The other alternative was devaluation. That is to restore the gold standards, but with different gold values of their currency. That, too, had some repercussions of course, for outstanding debts and so on. And, for various other reasons besides that some governments were reluctant to devalue or devalue very much. Consequently, in an effort to avoid either too much deflation or devaluation than they wanted, the governments in the 1920s made a fateful decision, particularly the British government, but other governments were involved. They decided that they wanted to restore the gold standard “on the cheap”, as it were, as a way of allowing themselves to not having to deflate that much or devalue by making their existing gold holdings go further.

And one of the ways that they tried to do this was to have international agreements with other central banks wherein, for example, the Bank of England would get the Bank of France to not ask for international settlements in gold itself but to just keep balances with the Bank of England and treat those balances as their reserve money, as their reserve currency… and this was called the Sterling System. And the Fed was involved too, with countries keeping balances with the Fed and not asking for their gold. It was a little like the later Bretton Woods system but was more ad hoc.

Well, that worked for a while. The problem was, what happens if the French changed their minds, for example, and suddenly asked for all of their gold back from England. The answer is, what happens is, you get the beginnings of a Great Depression. And this caused the whole house of cards that was known as the Gold Exchange Standard to collapse. That was the approximate cause of the Great Depression.

You can go into it with more details, but the story is, we had a jerry-rigged Post-World War I gold standard in the place of the classical international gold standard. It was a bit of a house of cards. It was very vulnerable to collapse, because it depended heavily on central bank cooperation – on cooperation of different central banks. Ultimately, it did collapse; this led to a massive deflationary crisis and into the breakdown of that jerry-rigged gold standard.

There were various attempts afterwards again to try to recreate the gold standard in some aspects. The Bretton Woods system was the outcome of that after World War II. It was also not a sustainable system. It was an inherently weak system and, by the way, the collapse there was a similar story to the one in the 1930s. The French now were accumulating claims, not against the Bank of England, but against the Fed in the 1960s. They began to ask for their gold toward the end of that decade, when they decided that enough’s enough… and that caused the Bretton Woods system to collapse.

So that’s the story, I know its long. But not a lot of people know about the details of the story about why the gold standard ended.

CM: And I think a lot of people have to realize, that when we are talking about the Bretton Woods system, and most of the international economic systems that developed after the end of World War II, is that the United States is essentially unscathed from the war. It had blood and treasure that was clearly spent, but our manufacturing base, and our industries and infrastructure, was not hindered but helped because Europe and Asia [were] essentially destroyed and we had all of these international captive markets and we also had the dollar pegged as the dominant international currency.

GS: We could sell the dollar as the new gold, while pretending for a while that there was still a gold arrangement because, in principal, dollars were convertible into gold but please don’t actually convert them was the set up. Gold is still a dollar for your central banks, but don’t ask for your gold, that will spoil everything…

CM: And at the same time, we were basically getting reparations for our involvement in the war from these countries that we asked not to redeem our gold-backed dollars for gold.

GS: Yes, in a way. But then of course, because of Vietnam and the Great Society, the Fed began to create lots of dollars. And so, the credits of the foreign central banks started to pile up. And like bankers generally, central bankers get a little bit antsy when they start getting a lot of credits piling up, like a bank receiving a lot of checks and leaving them in its safe. At some they say, “You know, maybe we need to cash these.” And that’s what happened. And it was bound to happen eventually. Well, I suppose, if the fed had been very disciplined it could have avoided it, but the other side of the story is that if you’ve got other countries agreeing not to cash your checks, as it were, the temptation is to write more of them, isn’t it?

So one way or another, I think this system could not have lasted. It did not last very long. And I don’t think it could have lasted very long. So, in sum, once the Humpty Dumpty of the old gold standard fell apart in the course of World War I, they never were able to put it back together again. And perhaps they could not possibly have done so. But they certainly failed to do so in a way that was sustainable.

CM: Well, it’s impossible to imagine in an era of profligate government spending that we have experienced over the course of the past four or five decades. [It] would have been impossible under the gold standard, because there simply wouldn’t have been enough gold to construct this far-reaching Imperial America that we’ve built for ourselves.

GS: There wouldn’t have been enough gold for the Fed to expand as much as it did in the Post-War period, but mostly in the 1960s and 1970s when it created all that inflation. I’m not sure that that would have been a bad thing in itself, because the inflation was a bad thing and we would have been better off with a lot less.

But, in any event, there wasn’t enough gold to sustain the system at the price level that existed even before the inflation. Let’s say the price level circa 1960, unless other central banks continued to cooperate by maintaining their balances instead of cashing them in. And that’s the thing that couldn’t have been reasonably expected to last forever.

I think that the bureaucrats really overestimated how much you could rely on central banks to cooperate in a system like that. They, perhaps, were being idealistic. But in any event, they put their hopes in an arrangement that I don’t believe could have lasted much longer than it did.

CM: The last topic that I would like to talk with you about is certainly no simpler than what we’ve been discussing. I think when you look at our current state of affairs and the global economy, the United States still holds a very significant leadership role, has a nearly insurmountable debt crisis. I don’t see a willingness for the kind of policies of austerity across all income brackets that would need to be put in place to fix our balance books and pay the debt down. We are approaching 20 trillion dollars in debt, and that seems like a science-fiction outcome to where we were at the turn of the millennium, when the government operated at a short-lived budget surplus at the end of the Clinton administration. This was the last time that I think we really had a chance to deal with the debt.

So that’s bad, but when you look at the average person’s living existence – when you look not just here, but around the world, in countries except for those that have just terrible barbarous regimes, the standard of living that people enjoy today in the fiat system is much better than it was in aggregate than when we had a classical gold standard…

GS: They certainly have a higher standard than they had, or than the average person had, under the classical gold standard. It’s a great question what kind of standard of living people would have had if the classical gold standard somehow had been kept up to this day. A very hard counterfactual to do, of course. By the way, I have seen some attempts to do it that are absolutely no good, that consisted of taking the growth rate of the gold standard era and assuming that it would have continued to this day, which is assuming that that growth rate was entirely due to that gold standard. But of course it’s not, it wasn’t.

The very rapid economic growth rate of the U.S. in the gold standard period was to an important extent due to the rapid population growth we had then. To correct for that, then the same extrapolations suggest that we wouldn’t be too much better off today, but you’d still be doing it wrong because a million things have changed since the 19th century. So it’s very hard to say what difference a gold standard would make.

I suspect, and it’s just a guess, that the gold standard of the old-fashioned good old standard, if it had somehow stayed in place, would have given us very good living standards today, because it maintains a lot of stability both domestically and, most importantly, internationally, because it had a fixed exchange rate. But it’s a very difficult counterfactual to offer, and you shouldn’t put much credence in what I or anyone else says about what a gold standard would have meant for us today, if it had stayed in place.

CM: Is it your opinion that the neoliberal economic model has failed us and that we need to look beyond this to get the global economy’s house in order? Or, do you think we just have to work within our current system to correct more than half a century of bad policy.

GS: As a matter of practical policy, Charles, of course tweaking is all we can do. But we can hope that we can tweak and keep tweaking and eventually move things in a substantial way in a direction that we think is desirable. As for the policies being generally bad, or the model of the neoliberal economic model, I wouldn’t go that far.

I don’t think it’s the neoliberal economic model that has gone wrong. I do think that has gone wrong in that it has accepted, in that we have accepted central banks and their management of fiat moneys and their discretionary management of such as the best of all monetary policy alternatives. And we’ve done that even though they keep failing us again and again and again. We’ve also accepted heavy-handed government regulation of private financial systems as the best way to deal with those and avoid crises, even though it includes things like “too big to fail” and other explicit and implicit guarantees that, in my opinion, and in many other economists’, are the most potent sources of excessive risk taking in the private financial markets.

So, I think we need to get away from both of those things. As I said, I don’t think that the gold standard needs to be part of that retreat and I don’t think that it’s the best alternative today. But I do think that we should get away with excessively discretionary financial central banks and we should get away from a system where we try to make banks behave well by getting government more and more involved in the banking system. Because remember, the big banks, especially, are powerful interest groups that shape government involvement in banking.

It’s not like the government is shaping regulations that come out in the public interest. The reality is, more often than not, the regulations end up serving the interests of the most powerful banks, even if that means undermining, in the long run, the well-being of the average American citizen. We’ve been doing that, by the way, since as far back in this country as you can imagine.

I want to point out, it’s very important to point out, if you look at other countries, particularly in the past but even in some extent in the present, you can find examples of countries that have had very stable banking systems with a lot less financial interference from their governments than we have had in the U.S. The U.S. is a very poor role model for other countries, because it is doing a bad job itself, yet we treat it like a role model because it’s big and rich. So, we assume that it does everything right, including the how it manages banks and money.

Canada, I think, is an outstanding example of a country that historically and recently has shown how you can do a much better job with less, that is with less government.

The Bank of Canada is much more rule bound than the Fed. It is much more transparent with its policies, with what’s its up to, with what it’s going to do. And all that. And it is no coincidence that Canada weathered the recent financial crisis quite well.

Still more fascinating is if you go back to the 19th century, when Canada had much less government regulation, it had the same gold dollar that we had. It had none of the financial crisis. It had none of the short-run financial instability. It had nice smooth interest rates. It had interest rates that were the same all over the country, more or less. And that’s because it had a banking system that, believe it or not, had hardly any regulations. A few dozen banks could branch all over the country; issue all of the convertible bank notes that they wanted to, more or less.

No reserve requirements. No portfolio requirements. No community reinvestment and stuff like that. And no bailouts, importantly. There was no deposit insurance and there was no central bank. No Bank of Canada as of yet to rescue failing banks. If they failed, well they had better find a buyer or they failed. It was as simple as that.

CM: Well, didn’t the United States have its own free banking era?

GS: No. Those banks in Canada were genuinely free, right. They could branch. They could issue notes. There weren’t very many of them that needed to get charters. The rules for getting charters were that you had to have a certain amount of capital and that was pretty much it. If it looked like you were a shady institution, the government wouldn’t give you a charter. But that hardly ever happened. You had to prove that you were serious, and weren’t just shysters.

Now what we had in America before the Civil War was that we had a bunch of states created laws called “Free Banking Laws” – it was the name of the laws and it has confused everybody, because people think Oh, all these places had banks and they were unregulated. But the name was free, but they weren’t free.

Every one of those banks, for example, every bank created under those laws couldn’t have a single branch. No branches! Absolutely prohibited branch banking and that was a big deal, because that’s how you have powerful, well-diversified stable banks. And it’s how they get funds where they are needed without going hat in hand to some correspondent, let alone some central bank.

The other thing is those banks couldn’t issue notes unless they secured them with bonds specified by their state regulatory authorities, which typically, What do you know?, included the bonds of the state government in question.

It turns out, economic historians have studied this, the main cause of failures of those banks – and in some of the systems they almost all failed – was the depreciation of the securities that, by law, the banks were forced to have as a condition for staying in business. So, the whole idea that the U.S. had free banking in the sense of genuinely free banking and that it failed is a terrible misconception that gives a bad reputation to genuinely free banking systems, even though, when you look at those – like the ones in Canada and also Scotland’s, which was pretty much unregulated and Scottish bankers were actually the models for the Canadian bankers, because alot of the Canadian bankers were of Scottish ancestry – if you look at those systems and their performance, why, it was jolly good. And it was recognized as such at the time. If you go back, you can see people in Scotland and outside, people in Canada and outside, including the U.S., saying, “Gosh, what a great monetary and currency system we’ve got here in Canada.”

And who says that about their currency system now? Who says that about their banking systems now?

Of course, nobody does, even though governments are regulating the bejebees out of them, they still have not anything to be that proud of. Of course, all countries have some good banks, but they also have a lot of bad ones. So, people need to look at those experiences and understand that the U.S., by contrast, has never had good banking laws, has never had good bank regulation. Not because it hasn’t regulated enough, but because it has always in some fashion regulated too much. Those are the plain facts of the matter.

CM: Well, thanks for clearing the air on that issue. I think, for numismatists who collect what we call “wildcat banknotes” and “busted banknotes”, the landscape was littered with banks that failed and it seems that there were quite complex reasons for this – and the general distrust for these types of note-issuing authorities, which leads to the federalized monetary system we have now.

GS: Yeah, if they can read, there’s an article by two fellows named Romnick and Webber called “The Causes of Free Bank Failures” about those so-called Free Banks and why they went under. It’s quite eye-opening and is one of the many pieces of research that straightens out the record on that topic.

CM: Well, George. I thank you for spending time with us today. I hope we can have you on again in the future.

GS: I’d love to do it again, Charles. As I said, it was my pleasure and I much enjoyed your questions. They were good questions and I like those kind of questions, I appreciate it.

CM: Alright, well you have a good week sir.

GS: Bye.

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