3.4 The gold standard and democracy

A gold standard makes each unit of currency convertible into a specified quantity of gold. Its advocates value this arrangement partly because it prevents governments and privileged banks from creating money without limit. It does not prevent a democratic government from providing social programs. It requires the government to finance them through explicit taxation, genuine borrowing, contributions, or reductions in other expenditure rather than by issuing unbacked money.

Slobodian reverses the relationship

Historian Quinn Slobodian presents gold as a constraint upon democracy. He argues that finite gold reserves can lock in austerity by restricting the expansion of credit and State spending, including spending intended to reduce inequality. He also associates hard-money politics with opposition to socialism and organised labour. This identifies government monetary discretion with democracy, but provides no justification for doing so.

Quinn Slobodian, “Central banks have pumped money into the economy, but it’s no substitute for democracy”.

The Austrian and classical-liberal argument is the reverse. Creating money enables a government to obtain real resources without levying an explicit tax. As the additional money reduces the purchasing power of existing money, citizens pay through higher prices and the erosion of wages, savings, pensions, and other fixed nominal incomes. The burden is difficult to identify, arrives unevenly, and is not presented to each citizen as a tax bill. Government can blame the resulting price increases on businesses, unions, foreigners, or other events.

This makes monetary financing a particularly opaque form of taxation. If citizens were shown the full tax required to finance a program, they might reject the program or remove the government responsible for it. Financing it through monetary depreciation can conceal that cost and evade informed democratic consent. Hard money can therefore protect democracy by forcing the State to present the cost of its policies openly. A government may provide the programs voters authorize, but it cannot disguise part of their cost by manufacturing purchasing power.

On this reasoning, hard money and democracy reinforce one another as restraints upon government. Hard money forces officials to disclose expenditure through taxes or genuine borrowing; democracy allows citizens to reject the cost, demand lower spending, or remove the officials responsible. Mises and Hayek did not assume that voters would always choose sound economic policy, but their case does not require treating democracy as the enemy of hard money. Where citizens oppose inflation and excessive State expenditure, democratic accountability helps enforce the same discipline as hard money. Slobodian overlooks this possibility and assumes instead that additional government spending power is itself an increase in democracy. He describes a government's power to subvert democracy as an increase in democracy.

Creating money does not create the doctors, medicines, buildings, food, energy, or labour consumed by a social program. It changes how those real resources are transferred and who bears the cost. A floating fiat currency can give government useful short-term flexibility during a monetary crisis or a collapse in private spending, and an increase in money need not cause an immediate rise in prices when the demand to hold money is also increasing. Neither qualification makes permanent social provision costless or establishes that monetary finance is democratic.

What Mises and Hayek would say

Slobodian's description of governments being prepared to weaken unions or "liquidate workers" also reverses the Austrian account of responsibility. Mises and Hayek did not advocate creating inflation and then using State-induced unemployment to suppress it. Their theory blamed an earlier artificial expansion of money and bank credit for distorting interest rates and financing investments unsupported by real saving. When those errors became apparent, they opposed another round of monetary or fiscal manipulation intended to preserve the resulting pattern of production.

Their reply would be that investments, not workers, had proved unsustainable. Ending artificial credit would expose malinvestments and require labour and capital to move into uses supported by voluntary saving and consumer demand. Unemployment could accompany that correction, especially where wages could not adjust, but unemployment was neither the object of the policy nor an instrument which government should deliberately create. The object was to stop the monetary intervention which had caused the unsustainable boom.

Ludwig von Mises, The Theory of Money and Credit; Friedrich Hayek, Monetary Theory and the Trade Cycle.

The same distinction applies to trade unions. Mises accepted the right of workers to associate voluntarily, bargain collectively, and withhold their labour. He objected to violence, intimidation, compulsory membership, and State privileges that prevented employers and other workers from contracting voluntarily. Removing coercive privileges is not the same as dismantling a voluntary union. To attribute a desire to crush worker organisation to Mises or Hayek requires direct evidence; it cannot be inferred from their support for flexible prices or opposition to inflationary credit.

Ludwig von Mises, Human Action, especially his discussion of union coercion and the right of association.

What defending an administered peg involved

Fixing a currency's price in gold did not make every historical gold-standard arrangement self-enforcing. The official parity fixed the price of gold in that currency, but not the domestic prices of other goods, services, and labour. If a central bank or fractional-reserve banking system expanded credit and domestic prices rose relative to those abroad, holders of the currency could redeem it at the official rate and send the gold abroad. An issuer which had created more redeemable claims than it could honour was then at risk of exhausting its reserves.

Historically, a central bank could respond by raising its discount rate and contracting credit. Falling spending, prices, and wages could reduce imports and make exports more competitive, but could also cause business failures and unemployment. Resistance to nominal wage reductions could prolong that adjustment. This describes how a centrally managed gold peg might be defended after excessive credit had already been created. It does not show that advocates of free markets wanted government to manipulate the economy, manufacture unemployment, or dismantle voluntary worker associations.

Evidence about democracy

One cross-country study reports a relationship between political institutions and the gold standard. In a sample of thirty countries between 1860 and 1913, its measures of democracy were negatively associated with adoption of and continued adherence to the gold standard after controlling for several observable economic and political factors. A one-standard-deviation increase in its broad democracy measure was associated with an approximately seven percent reduction in the probability of adherence. The estimate survived several alternative specifications, but was driven mainly by political competition in peripheral countries and was statistically stronger for adoption than suspension.

This correlation does not establish Slobodian's attribution of motive and may exist for other reasons. Democratisation occurred alongside changes in economic development, State capacity, political stability, access to foreign credit, exposure to war, and integration into international trade. Historical measures may not capture all of these influences adequately. Causation might also run in the other direction if monetary institutions or the economic interests supporting them affected political reform. Because the study is an observational comparison rather than a natural experiment, it cannot isolate democracy as the cause or identify what voters wanted. Still less does it show that democratic populations favour inflation or monetary debasement, or that Mises, Hayek, and other advocates of sound money feared democracy because workers would vote for such policies.

Bert S. Kramer and Petros Milionis, “Democratic constraints and adherence to the classical gold standard”, Explorations in Economic History, 2022.

Conclusion

Slobodian shows that hard money constrains the State. He does not show that constraining the State constrains democracy. His argument assumes that government monetary discretion represents the wishes of the people, whereas the advocate of hard money argues that this discretion permits governments and privileged banks to act against the public through a concealed tax and the socialisation of eventual losses.

Slobodian may criticise Austrian monetary theory or argue that its proposed correction would have harmful consequences. He cannot fairly replace that theory with the accusation that its purpose was to liquidate workers. To establish his claim about motive, he would need evidence that the particular gold advocates he names sought unemployment in order to weaken workers, opposed voluntary unions as such, or supported gold because they feared democratic voters. A history of central banks contracting credit, a correlation between democracy and gold-standard adherence, and the fact that hard money constrains government do not establish those propositions. Without that evidence, the accusation confuses opposition to government monetary manipulation with opposition to democracy itself.