There is a fascinating debate about whether Frank Baum’s magnificent children’s tale The Wonderful Wizard of Oz was really intended as an allegory for the gold standard.

But first, US Politics.

With the upcoming US Presidential Election in 2020 the Federal Reserve becoming increasingly politicized and subject to market coercion, it seems increasingly relevant to conflate politics and economics.

After all, it is hardly the first time in US history that the debate over the monetary system has spilled over into presidential politics.

In July 1832, President Andrew Jackson killed the Second Bank of the United States by vetoing a bill to renew its charter, saying that “the rich and powerful bend the acts of the government to their selfish purposes.” The United States did not again have anything resembling a central bank until Congress created the Federal Reserve System in 1913.

Finally, there was the Free Silver movement was an expansionary-currency philosophy espoused by the populist candidate William Jennings Bryan at the Democratic convention in 1896. In this era, the concern was that the gold supply was inadequate to keep up with the fast rate of growth in the United States, leading to a deflationary spiral.

The Free Silver advocates wanted to be able to have money backed by silver at the ratio of 16:1 versus gold. This change would have raised inflation and helped out heavily indebted farmers, who were suffering under mortgage payments that remained fixed even as the prices of their agricultural goods fell.

So, back to The Wizard of Oz and the idea that it was really intended as an allegory for the gold standard.

The book (written by L. Frank Baum and first published in 1900) formed the basis for the classic 1939 Judy Garland movie of the same name. The notion that the story might be an allegory was first raised by high school teacher Henry Littlefield in 1964, and later taken further by other authors, most notably economist Hugh Rockoff in a 1990 Journal of Political Economy piece.

Whether right or not, the allegory is often used as a teaching tool for efficient introduction to monetary economics concepts. Littlefield draws the remarkable connection between the characters in the book and the main players in the 1890’s populist movement:

The Scarecrow represents the farmers, the Tin Man represents industrial workers, and the Cowardly Lion is William Jennings Bryan.

The characters in the Emerald City see everything through green glasses (green paper currency), and the yellow brick road represents for the gold standard (“Just follow the yellow brick road!”). The cyclone that carried Dorothy to the Land of Oz represents the economic and political upheaval.

Importantly, in the book version, Dorothy has silver slippers, not ruby ones. At the end of the story, Dorothy learns that to return safely to her family farm, all she needs to do is tap her shoes together, signifying the simple answer of the Free Silver movement.

So, this is not meant to over-analyze a children’s book nor advocate Bitcoin as the next Free Silver movement.

Regardless of author Frank Baum’s intentions, there is little doubt that deflation occurred at times under the gold standard, and the problem illustrates some of the drawbacks of any commodity-backed currency. Indeed, the idea that the gold standard produced spectacular stability is a fantasy and a false image of what the gold standard was really like.

The gold standard era was punctuated by deep recessions (the recession of 1893 was in some ways almost as profound as the Great Depression of the 1930s). There were bank runs and long bouts of deflation. Nothing stopped governments from willingly abandoning the gold standard when they desperately needed funding to pay for World War I. Once citizens realized that the gold standard might not go on forever, it proved extremely fragile. There is little reason to believe that a modern-day gold standard would fare any better (despite what Peter Schiff might say).

But just as it is hard to design a monetary system where there are rules that is always just work, it is hard to design any incentive mechanism or institutional set of rules that is always going to look optimal ex post. Hence, despite the inevitability of having some human error, it is probably ideal to have a system that tries to balance flexibility and commitment. In my view, the modern central bank has suffered from an overshoot in the weight put on rigidity versus flexibility; central bankers were too ready to believe that inflation targeting and simple rules would essentially eliminate any need for trade-offs. The experience of the past 10 years has shown how wrong that view is.

Hence, we are in need for another allegorical fantasy novel.