Who knows what causes the eternal appeal of the gold as a basis for money?

Some ideas seem to return only by becoming mirror reflections of themselves. A century ago William Jennings Bryan rallied rural and small town populists to his presidential campaign by saying the country should leave the gold standard. In the 2008 presidential election two populists on the right have made a bid for similar votes by suggesting we return to it.

There is probably a psychological reason for this. But first the history:

In a speech to the Democratic convention of 1896 Bryan argued that farmers, small business people and other borrowers were being crucified on a “cross of gold.” He said by limiting the availability of currency that could be used for economic growth, the gold standard was causing a period of deflation that had lasted for more than twenty years. With prices for the products they had to sell constantly falling, those borrowers had to in essence pay their loans back with money that was worth more it was worth when they took out the loans.

In 2008 two of the more populist Republicans in the primary, former Arkansas Governor Mike Huckabee and Texas Congressman Ron Paul, both said the U.S. dollar should be based on gold or some other precious metal. They argued that federal deficit spending would inevitably lead to inflation and the devaluing of the dollar. They cite statistics that suggest gold has maintained it’s buying power compared to our current fiat currency.

Ron Paul, Mike Huckabee, and others who call for the return to a gold and silver standard also have a conservative ideological reason for backing the idea – it would limit the amount of debt the federal government could issue and therefore limit the size and power of that government.

It’s interesting to realize that economic libertarians seem to be backing a form of currency that would be by definition deeply restrictive on commerce. And few economists consider returning to a precious metal standard a serious proposal. For one thing, the amount of federal debt. compared to the size of the economy as a whole is actually fairly small, as is the current inflation rate. And many argue that what inflation we have is not due to an increase in the money supply, but to rising prices for important commodities like oil – which was also the cause of the inflation during the 70’s when the dollar did lose a lot of its purchasing power.

It’s not much of an exaggeration to say the dollar is really on a crude oil standard, given the importance of that commodity to our economy.

The dollar has fallen of late, and at times it has risen as well. One sign that the fall in the dollar may not be linked to government borrowing is the continuing ease with which the government borrows; if the U.S. were debauching the currency by issuing debt, treasury bonds should get harder to sell. And they’re not.

A possible reason for the difference between how the gold standard is viewed now and a hundred years ago has to do with the vested interests of the groups the politicians hope to represent. In 1900 the bulk of the populists were farmers or otherwise tied to agricultural economy. Farmers require a steady supply of credit, if for no other reason than because their main income pays off only at harvest time. They have to fund their farms somehow during the rest of the year.

Conversely the current Republican populists tend to be older people, many of them retired, or people with some savings. Inflation is a worry for someone living on savings or a fixed income, because interest payments and other returns on investments might not keep up with the rising prices.

But it seems to us there is a psychological element at play here as well. One of the most unsettling things about our often very unsettling economic environment is the fact that we can’t put our hands on our worth. It can be disturbing to have to rely on a fiat currency, a piece of paper that is supposed to be a safe store of value only because we as a society say it is.

Precious metals seem more real, closer to something permanent – a very comforting idea when the bulk of someone’s net worth might only exist as a string of digits in a mutual fund’s computer. It’s an instinct that recalls the Physiocrats, a group of European economists before Adam Smith who held that all economic value comes from the land and agriculture. In the American context these fears at times dovetail with a streak of paranoia about banks (and now the federal reserve) that has roots that go back at least to the Know Nothings.

The notion of returning to a precious metal standard for the dollar seems to regain currency (as it were) every time we have an economic downturn. Never mind that a gold or silver standard would be profoundly deflationary – as in depression causing, just like it was in 1890 – we couldn’t even be sure it would do what it’s supposed to.

Gold and silver are supposed to be eternal and therefore safe. But it seems to us there is nothing inherent in the metals themselves that ensures value, other than the fact that they don’t corrode. If quartz crystals were rare it would make just as much sense to designate them as specie.

And in fact the supply of gold and silver can fluctuate quite dramatically. There are documented cases of sharp inflation caused by gold and silver strikes in North America and in South Africa. Historians have argued that during the 16th century much of Europe the was gripped by inflation because of the huge amounts of gold and silver brought back from the new colonies in Latin America.

As recently as 1980, speculators attempted to corner the silver market, provoking a bubble that burst on what was known as Silver Thursday.

If our fiat currency is not based on precious metals, what is it based on? We say the dollar is in a sense based on our confidence, specifically our confidence in the ability of the U.S. Government to pay its bills. This is what we mean when we say that the dollar is backed by the full faith and credit of the United States.