Former foreign affairs minister Maxime Bernier - Bernier the Bold - says that, a few years down the road, Canada will find itself compelled to engage in "a serious debate" on restoration of the gold standard. This was only one of Mr. Bernier's provocative public-policy observations since he swapped high office for missionary work in the field. (In recent months, he has advanced a series of radical reform proposals, including an eminently sensible "Zero Budget Growth" cap on federal spending.) But his reference to the gold standard was one step too far, even for otherwise sympathetic commentators. Maclean's astute columnist Andrew Coyne, for one, dismissed it as "whacky."
And judging by prevalent 21st-century academic assumptions, it was. For sure, Mr. Bernier will have few economists in his camp. Yet, it is an historical fact that the gold standard served the world well in the 19th century, a Golden Age of economic, scientific and social progress. Mr. Bernier correctly notes that the gold standard produced "the most prosperous society in human history." Economic growth was mostly stable. Periodic contractions were mostly brief. Prices fell rather than increased: By the nature of the discipline it imposed, the gold standard extinguished inflation - achieving a better record than any 20th-century central bank.
Why, then, did the gold standard fail - or, in retrospect, appear to have failed? Bank of Canada Governor Mark Carney answered this question in a speech in New York last November. Gold failed, he explained, because cheating governments subverted it.
First, he noted that gold is, indeed, irrelevant now as a guarantee of the integrity of paper currency. It represents a mere 10 per cent, or $1-trillion (U.S.) of the currency reserves held by governments - "and a much smaller percentage of the global money supply."
Second, he noted that the current rise in the price of gold reflects "exuberant pessimism" - presumably a global measure of investor confidence in the capacity of central banks to avert a number of sovereign bankruptcies.
In a time of trouble, in other words, investors have voluntarily executed an informal return to a gold standard of their own making. When the state cannot guarantee the integrity of the money supply, people will perform the function themselves. Investors who put their trust in gold at the time of the dot.com crisis (gold: $300 an ounce) have preserved their wealth much more effectively than have the central banks that profess to protect the integrity of paper money. The price of gold is now more than $1,200 an ounce. Judged against gold, the dollar (along with other currencies) has lost 75 per cent of its value in the past decade.
Mr. Carney's description of the collapse of the official gold standard captures the process neatly: "Under the classical gold standard, from 1870 to 1914, the international monetary system was largely decentralized and market-based. There was minimal [government]support apart from [a commitment to maintain]the gold standard. [But]the gold standard did not survive World War 1 intact."
What went wrong? "Money-financed war expenditures and shifts in the composition of global economic power undermined prewar gold parities," Mr. Carney said. "There was no mechanism to co-ordinate an orderly return to inflation-adjusted exchange rates." There was an available mechanism, of course: the markets. Governments, however, were no longer decentralizing power; they were centralizing it - as the term "central bank" suggests.
The gold standard collapsed when Britain went bankrupt (for all practical purposes) in the First World War - and financed its debt by printing substantially worthless paper money. Other countries cheated in a variety of ways. Though gold's global collapse took a few decades to finish, the trend to paper could not be reversed. Recessions, inflationary spirals and rising debts inevitably followed.
You can argue that "the gold standard failed." You can do so, however, only by blaming the medium of exchange for its own debasement. In fact, gold and paper - and all other measurements of wealth - are equally vulnerable to debasement. The relevant question is: Which is the more vulnerable?
In the 20th century, people could put their faith either in God, in gold or in government. There were no other options. For the most part, they trusted government. They can't say that they weren't warned. British economist John Maynard Keynes, the great champion of paper money, anticipated that "continuous inflation" would be the most probable consequence of fiat currency - currency backed by nothing but a government's promise to replace one piece of paper with another of the same design.
"By a process of continuous inflation," Keynes said, "governments can confiscate an important part of the wealth of their citizens." This confiscation, he said, "will impoverish many, enrich some."
Mr. Bernier errs in his defence for a return to the gold standard - but not for the reason most people suppose. Mr. Bernier didn't go too far. In fact, he didn't go far enough. We entrust the state with our currency - whatever kind it might be - at our own risk.