On NPR this morning, All Things Considered actually had as a guest someone who claimed that the sixteenth amendment (which authorizes the income tax) is illegal, and that the only constitutional financial system is the "gold standard". In his eyes, we need to abolish the Federal Reserve and return to a simpler system. If I recall the segment properly, he's suing the government to accomplish just that.
Now, that's the traditional purview of Ron Paul fans, and of people who think National Treasure is a documentary. But I've been seeing this mode of thinking, and its shibboleth, the word "fiat", appear with alarming frequency on the Left too, and even on this very site.
Below the fold, I explain why this kind of thinking leads to really terrible policies.
Let's start with this word "fiat" itself. Goldbugs (the people we're talking about here) love to use it in phrase "fiat currency". Let's be honest: the word is used because it's esoteric and exotic. Because we seldom see the word in daily life, it takes on an unwarranted menacing quality. All "fiat" means is "by decree" --- that is, by law. Nothing frightening about laws.
All currencies are "fiat currencies". That is, their value is regulated somehow. (I suppose livestock, cowry shells and lumps of precious metal are exceptions.) Goldbugs merely favor a particular fiat. Specifically, under their favored "gold standard" system, each dollar represents a fixed amount of gold.
That peculiar property doesn't affect daily life. People never redeem their paper dollars for chunks of gold, because gold is inconvenient. Checks are written, accounts are debited, and interest is earned without any reference to gold, but only to dollars (just as in our present system). One can live a lifetime without having to think about the relationship between a dollar and a particular number of gold atoms, and when we were on the gold standard, that's what people did.
The actual effect is the gold standard is macroeconomic. Because each dollar represents a particular number of gold atoms, the government can no more conjure additional dollars at will than it can make gold at will. Therefore, the money supply can't arbitrarily grow, the government can't print money to pay its debts, and inflation is held down.
Today, we have a far better method of regulating the money supply. The Federal Reserve has a knob called the "prime interest rate" that controls the amount of money banks are required to keep instead of lending out. Because of the way fracitonal reserve banking works, banks create money when they make loans. To expand the money supply and increase inflation, the Federal Reserve simply reduces interest rates. To slow inflation, the Federal Reserve increases interest rates. In this way, we can react to how the economy is doing.
Going on a gold standard is equivalent to just gluing that interest rate knob at a certain value and declaring (by "fiat", as it were) that it can never change. Because a gold standard leads to very slow growth of the money supply, going on the gold standard is equivalent to setting very high interest rates.
Would you support the Federal Reserve jacking up interest rates right now? I thought so. Going on the gold standard is like having a car stuck in second gear. It creates conditions that are far from optimal in most situations, and robs us of the ability to adapt to a changing world.
In terms of interest rates, money supply, and inflation in particular, sometimes (like in present times) you want inflation in order to discourage people from just sitting on their money. Recessions are caused by excess savings. You want people to spend their money, cause economic activity, and create jobs. Modest inflation supplies an incentive to do that, and the realization that we could harness inflation for social good was a profound advancement of our civilization. Doing away with that facility is, in a word, stupid.
(As an aside, some people advocate abolishing the Federal Reserve, retaining our current monetary system, and just giving the monetary policy controls to Congress. That's almost as stupid: by doing that, you replace experts with laymen [in the best case], or corrupt thieves. Doing that would be like having Congress create television standards instead of letting the FCC do it, and would have similarly disastrous results.)
I am grateful that goldbugs do not hold positions of power, and not just because they advocate terrible monetary policy. The thinking that leads to the gold standard also leads to other terrible positions. It refuses to see society as a dynamic and emergent system: instead, any mismatch between society and theory must be a flaw in society to be corrected, not an impulse to improve the theory. They plug their ears when people talk about real-world social justice. They don't realize that their certitude is a sign of naivety, not insight. As Krugman put it, they mistake beauty for truth.
This mode of thought gave us neoconservatism, and it gave us the Chicago economics that led to our current economic catastrophe.
We all know the GOP is a gang of crooks. The goldbugs and Chicago economists of the world are more dangerous, though. They truly believe they're doing good, and what they say makes a certain kind of superficial sense, the kind that discourages further analysis.
I can imagine a future in which these people gain power by exploiting dissatisfaction with both the GOP and Democratic Party, and if that happens, we're in for a world of pain.