Which is better—the gold standard or fiat currency? Could you make a sound economic argument for your position?
In Narrative Economics, economist Robert J. Shiller argues that human beliefs and actions, rather than numbers and statistics, ultimately drive economics. Specifically, he writes that beliefs about the gold standard are part of a recurring American economic narrative.
Read more to learn Shiller’s take on the gold standard vs. fiat currency debate.
Gold Standard vs. Fiat Currency
The gold standard vs. fiat currency debate has gone on for centuries. Different groups have argued about the merits and pitfalls of a hard currency system—generally with the wealthy being in favor of a currency backed by a tangible asset like gold, and economically disadvantaged Americans supporting fiat currencies (government-issued money not backed up by a tangible asset).
In the 19th century, according to Shiller, there was a prevailing belief that backing dollars with gold was a way to uphold truth and virtue, essentially extending moral qualities to the currency itself by tying it to something “real” and solid. This gold standard, seen as a bedrock of financial integrity, was rooted in the idea that a currency’s value should be directly connected to a tangible asset like gold. The popular sentiment was that “strong money” equated to “strong morals.”
The gold standard narrative thus acquired a moral and emotional charge that pitted different classes against one another. Typically, wealthier Americans based in the banking centers of the East, who were often creditors, favored the continuation of a gold standard; poorer Americans, who were often indebted, working in agriculture, and based in the Midwest and West, favored a coinage system that was based on both gold and silver at defined ratios (“bimetallism”).
The bimetallists saw themselves as champions of the common people, believing their monetary policies would enable inflation, which in turn would reduce the real value of people’s debts. In response, the gold standard stalwarts (“goldbugs”) clung to the narrative that straying from the gold standard was synonymous with irresponsibility, shiftlessness, and loose morals. These attitudes drove the “hard money” policies that persisted until the gold standard was dismantled in a series of developments throughout the 20th century.
|The Gold Standard and Bitcoin
In the book, Shiller does briefly touch on some parallels between the Bitcoin narrative and the gold standard, but it’s worth exploring this more in-depth.
Some writers have noted the similarities between the two monetary systems. Both Bitcoin and the gold standard are characterized by a limited supply. The Bitcoin protocol explicitly defines the Bitcoin supply and the gold standard is limited by the physical supply of gold. This supposedly makes both assets resistant to the inflationary pressures often associated with fiat currencies.
In 19th-century debates about bimetallism, those in favor of using both gold and silver as standards argued that focusing on gold would concentrate wealth in the hands of people who were already wealthy. In today’s cryptocurrency debates, those who are skeptical of Bitcoin tend to put forward similar arguments, while those who favor a “hard” money, limited-currency approach to guard against inflation often find much to appreciate about Bitcoin.
However, there are crucial distinctions. Bitcoin operates as a decentralized digital currency without the need for a central authority, while the gold standard explicitly required governments and central banks to manage the supply of gold. This distinction informs the contemporary debate about whether a decentralized cryptocurrency like Bitcoin can serve as an alternative to traditional fiat currencies controlled by central authorities.