The Truth Behind The Swiss Gold Referendum

A recent column in US News & World Report, The Swiss Gold Rush by Pat Garofalo, its assistant managing editor for opinion, is subtitled “A push for the gold standard in Switzerland is symbolic of Europe’s rising right wing.” US News & World Report hereby descends from commentary to propaganda. Who edits its editors?

To begin with, the Swiss referendum, decisively and sensibly rejected by the Swiss electorate, was not about “the gold standard.” It was a vote on a proposition requiring its central bank to increase its gold reserves from around 8% to 20% — implying the acquisition, over five years, of 1,500 tons (“costing at about $56.3 billion at current prices,” reports Bloomberg), never to sell gold, and to hold that federation’s gold within Switzerland.  That had nothing to do with the gold standard.

The Swiss voted 77% – 23% to reject this proposition. The Swiss National Council had rejected the initiative by 156 votes to 20 with 22 abstentions, and the Council of States by 43 votes to 2 abstentions. And the referendum may well have been a bad, or at least silly, idea.

With a Swiss GDP of around $650 billion (USD) per year the requirement to acquire $10B/year of this iconic shiny-and-ductile commodity while not insignificant, at less than 2% of annual GDP, hardly would have been crippling.  That said, the gold standard was not on the ballot.

As for the gold markets themselves, according to a 2011 report by the FT, reporting on a study by the London Bullion Market Association, there was a $240bn average daily turnover in the London bullion market. The annual mandated Swiss acquisition, then, apparently would have amounted to about … half an hour’s trading volume on one of the world’s major gold marketplaces.  Commodity investment, however, has nothing to do with the gold standard.

Demonetized (as at present), gold merely is a commodity. The gold standard is a quality standard, not a quantity standard, and is about maintaining the integrity of the currency, not limiting its supply. This Swiss referendum substantively was irrelevant to monetary policy. As’s own Nathan Lewis perceptively has pointed out the amount of gold held, under the gold standard, as reserves by banks of issue fluctuated dramatically and immaterially.

The Swiss referendum generated a modicum of international attention and considerable criticism. The referendum presented, in fact, as misguided. It did not, however, even imply a restoration of the gold standard much less prove itself, as Garofalo presented it, as a symptom of “Europe’s rising right wing.”

Garofalo stated that “the gold standard is the idea that a nation’s money supply should be tied to gold, rather than being fully controlled by its central bank.”  This is not even a crude approximation of the gold standard. The gold standard simply holds that the value of a currency shall be defined by, and legally convertible into, a fixed weight of gold.

Garofalo implies, and cites other writers who claim, that the gold standard constrains the money supply.  Not so.  As Nathan Lewis has pointed out, for instance, from 1775 to 1900 the amount of gold in the U.S. monetary system increased by 3.4x while the currency increased by 163x without causing a depreciation in value of the currency.

The gold standard is a qualitative, not quantitative, standard. It does not constrain growth of the money supply, merely calibrating it reasonably well (albeit imperfectly, perfection having never been attained by any monetary system) to the real economy’s money demand. Lewis:

between 1880 and 1900, the monetary base in Italy actually shrank by 4.8%.  However, the monetary base in the U.S. grew by 81% over those same years. Both used gold standard systems. So, the “money supply” not only has no relation to gold mining production, but two countries can have wildly different outcomes during the same time period.

As for whether the gold standard is superior to fiduciary management there is abundant evidence that the organic nature of the gold standard consistently outperforms the synthetic nature of central bank discretion.  Garofalo references a poll of 40 academic economists who dismiss the (admittedly unfashionable) gold standard.

In criticizing the performance of the gold standard Garofalo relies on The Atlantic’s Matt O’Brien.

Indeed, when it was in force, the gold standard brought with it a whole host of negative effects, and as Matt O’Brien wrote in The Atlantic, “was a devilish device for turning recessions into depressions.” It ensures that a central bank can’t respond to a crisis by putting more money into the financial system, greasing the wheels of the economy, since the money supply is restricted by an outside factor.

As for another celebrity on whom Garofalo relies, Nouriel Roubini, his ill-founded hysteria on the gold standard has been critiqued here and here. O’Brien and Roubini are entitled to their own opinions but not to their own facts.

As economic historian Professor Brian Domitrovic, also at, relates, The Gold Standard Had Nothing To Do With Panics and Busts,

Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust.

Rather than relying on commentators and academics, pro or anti gold, it might be pertinent to turn to the thoughts of central bankers. Herr Dr. Jens Weidmann, president of the Bundesbank, in a 2012 speech referred to gold as “in a sense, a timeless classic.”

And Garofalo makes no reference to the 2011 Bank of England Financial Stability Paper No. 13, summarized and hyperlinked by contributor Charles Kadlec here. This study by the prudential Bank of England — not for nothing called “the Old Lady of Threadneedle Street” — provides an empirical assessment of the fiduciary management approach ushered in by Presidents Johnson and Nixon and, at the time of the study, in effect for 40 years.

Financial Stability Paper No. 13 contrasts the world economy’s real performance under the Johnson/Nixon protocols relative to the Bretton Woods gold-exchange standard and the classical gold standard. The Bank of England analysis, based on the empirical data, concludes that fiduciary management greatly underperformed (for economic growth, financial stability, inflation, recession, and all other categories assessed) its predecessor systems.

Garofalo legitimately cites the weight of elite academic economic opinion against the out-of-fashion gold standard. That said, this august collection of economists, few if any of whom foresaw the panic of 2007 and ensuing Great Recession, seem to be guided by former U.S. Treasurer Ivy Baker Priest’s motto, “Often wrong, never in doubt.” Readers deserve to be provided with the weight of the evidence to, at least, supplement the weight of elite opinion.

More troubling are Garofalo’s innuendos tying gold standard proponents to sinister “right-wing” politics. There is no meaningful correlation between advocacy for the gold standard and, for example, anti-immigrant sentiment. I, a gold standard proponent, am very much on record for a generous, inclusive, immigration policy (including a path to citizenship for undocumented aliens). So is American Principles In Action, the gold standard’s most prominent advocacy group in Washington, DC (which I professionally advise).

The figure most synonymous with right-wing totalitarianism, Adolf Hitler, virulently opposed the gold standard.  The gold standard then was, as it now is, intrinsic to a liberal republican order. Hitler is recorded as saying:

I had no interest in gold— either natural or synthetic.Our opponents have not yet understood our system. We can be easy in our minds on that subject; they’ll have terrible crises once the war is over. During that time, we’ll be building a solid State, proof against crises, and without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off into a concentration camp ! That’s the bastion of money. There’s no other way.

Garofalo states that “In 2012, Republicans kowtowed to their more extreme members by including a call to return to the gold standard in their party platform.”   This, flatly, is wrong.  The 2012 GOP platform did not call to return to the gold standard.  It simply called for a ““commission to investigate possible ways to set a fixed value for the dollar.”  (Nor did it represent a “kowtow” to “more extreme members.”)

Instead of reciting the platform language Garofalo relied on a distorted description of it by commentator Bruce Bartlett, to which he links.  (Bartlett’s reference, in his New York Times Economix blog, to a “metallic basis” was to platform language referencing a commission established by Reagan, not the call to action in the 2012 platform.)

Garofalo states that “Kentucky Sen. Rand Paul – has mentioned the possibility of a return to the gold standard.”  The source to which he links states shows the Senator entirely noncommittal:  “Paul wouldn’t comment on whether a gold standard is needed or not….”  Sen. Paul, pressed by a questioner, simply called for a commission to study the matter, which has a subtle yet materially different connotation from having “mentioned the possibility.”

Garofalo’s misrepresentations are, at best, sloppy, giving readers good cause to wonder about the integrity of this writer’s work. His collected writings are a compilation of progressive nostrums: complaining that gas prices are too low, opposing corporate tax reform, criticizing President Obama for refusing to propose a gas tax, supporting the mandated minimum wage, throwing bouquets to the IRS, and so forth.

Garofalo is a propagandist rather than a commentator. Good on him: the discourse is made spicier by propaganda.

That said, the readers of US News & World Report deserve much better quality propaganda than this. The Swiss referendum may have been silly but it was not about the gold standard. The gold standard neither is “ugly” nor evidence of a “rightward lurch.” And, in the words of its foremost living proponent, Lewis E. Lehrman (whose eponymous Institute I professionally advise), “By the test of centuries, the true gold standard, without reserve currencies, is the least imperfect monetary system of history.”

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