Have you heard the one about Big Government and the Gold Standard?

(Proof that even dull 'blogs can inspire interesting questions:)

Ron Paul has popularized it of late, but it is an opinion long current among downmarket libertarians, that going off the gold standard enabled the Federal government to grow to its current size and that going back on the gold standard is a sensible route to decreasing the size and scope of government.

There may even be a kernel of truth to it: going off the gold standard meant that the US as a nation could run up a current account defecit without provoking an attack on the dollar, doing away with Triffin's Dilemma, carrying with it two side effects, the first being that private business was free to import according to market prices, without a need for quotas in order to prevent a major depression, and that the government, too, was free to spend more on foreign aid and defense. The balance of payments was no longer a make-or-break issue; the dollar's peg to gold, which to a modern eye looks artificial and superstitious, no longer unnecessarily complicated everyday economic activity.

That isn't what vulgar libertarians have in mind, though, when they denounce the Federal Reserve and call for a return to a gold standard. Triffin's Dilemma is also resolved when the US Dollar is no longer the base currency for the rest of the world, but massive government interference in the marketplace, in the form of export subsidies, high tariffs, and import quotas, would nonetheless be necessary to prevent an attack on the dollar, deflationary spiral, and depression. I doubt that even Ron Paul would give up free trade to get gold.

The argument instead is that the "government can and does Just Print Money to finance Wars, Welfare, and All That." Translating crass ignorance of the money creation process out of that statement, the libertarian gold bugs' allegation is that the Federal Reserve is a major enabler of defecit spending.

Is that so? The numbers don't bear the story out. As of the seventh of January, 2008, according to the Treasury Dept's Bureau of Public Debt, the total US public debt was $9,199,557,987,743.58, of which $4,083,366,539,555.28 is intragovernmental (owed by the government to itself: think "Social Security Trust Fund") and $5,116,191,448,188.30 is held by the public, including by the Federal Reserve. The Federal Reserve, as of October 2007 held $775,000,000,000 of the public debt. That amounts to roughly 8% of the total, or 15% of the portion held by the public.

The Federal Reserve thus enables about eight percent of Federal defecit spending. Is taking a purchaser of eight percent of the debt out of the picture really worth going back to the days when imports and exports were a political issue, or worse still, to the era of Great Depressions and even greater Panics of 1873, of cyclical depressions and deflationary spirals?