Despite the many advantages that a sound money standard would confer on ordinary savers, wage earners, and small business owners – from greater price stability to a check on inflationary erosion, to a closer alignment between savings and investment – such a regime has no shortage of powerful opponents.
Chief among them is Wall Street, whose interests are deeply entwined with the flexibility and discretion afforded by fiat money.
Indeed, contemporary Wall Street’s hostility to a sound money standard is structural.
A monetary regime anchored to gold, or any similarly binding constraint, would not merely trim profits at the margins. It would alter the operating environment in which modern finance has flourished, stripping away many of the advantages that have made the largest financial institutions so powerful and so persistently profitable in the fiat era.
How Does Wall Street Benefit From Unsound Money?
At the center of the matter is credit expansion.
Under a fiat system, the capacity to expand loan portfolios is limited far less by underlying savings than by regulatory frameworks and central bank policy. Banks can extend credit, securitize it, and recycle balance sheets with a fluidity that would be impossible under an honest monetary regime.
For institutions accustomed to generating returns through the continuous expansion of credit, such a constraint would feel less like reform and more like suffocation.
This dynamic is reinforced by the interest rate environment.
Central banks, through their control of short-term rates and their influence over the yield curve, have demonstrated a persistent willingness to suppress borrowing costs.
Wall Street benefits directly. Cheap funding allows for larger positions, thinner spreads, and a proliferation of strategies that depend on abundant liquidity.
Under a hard money system grounded in specie, interest rates would be far less amenable to such administrative control. They would reflect time preferences and risk assessments rather than policy objectives. The result would be higher and more volatile borrowing costs, compressing margins and curtailing the scale of leveraged activity.
Government Bailouts Encourage Risky Behavior
Layered atop this effective pair of subsidies is the implicit guarantee provided to Wall Street by the Fed’s lender-of-last-resort function.
The presence of a central bank willing to inject liquidity during periods of stress fundamentally alters risk-taking behavior. Financial institutions operate with the expectation that, in extremis, markets will be stabilized and key players supported. This expectation is not theoretical. It has been repeatedly validated.
Under a gold standard, such interventions would be severely constrained. Liquidity crises would force rapid deleveraging and reallocation, imposing losses where they fall. The removal of this backstop would expose balance sheets to a level of discipline that modern finance has largely avoided.
The same logic extends to moral hazard more broadly.
The fusion of expansive monetary policy and discretionary intervention has produced a system in which gains are largely privatized while losses are, at critical junctures, socialized.
Wall Street’s largest firms are well-positioned to capture the upside of risk-taking while relying on systemic importance, “Too big to fail,” as a shield against catastrophic failure.
A sound money regime would erode this asymmetry. Without the capacity to create reserves ex nihilo, the state’s ability to cushion losses would be sharply limited, forcing a more symmetrical distribution of risk and reward.
Government finance provides another channel of benefit.
The modern fiscal state depends on the ability to run persistent deficits, financed in no small part through the issuance of debt that is readily absorbed by financial markets and, ultimately, by central bank balance sheets. Wall Street sits at the center of this process as underwriter, distributor, and trader of sovereign debt.
It is a lucrative, high-volume business built on the assumption of continued monetary elasticity.
A gold standard would impose far stricter limits on deficit financing, reducing both the supply of government securities and the ease with which they could be monetized. The contraction of this pipeline would remove a reliable source of revenue.
The broader phenomenon of financialization is similarly tied to fiat conditions. Sustained periods of low interest rates and ample liquidity have driven asset prices upward, inflating equities, real estate, and fixed-income securities.
Rising asset values generate trading activity and underwriting opportunities across wealth management and advisory services.
The Monetary System Is Designed to Benefit Certain Parties
Closely related are the distributional effects of fiat money creation: the Cantillon effect.
New money enters the economy through specific channels, typically the banking and financial system. Those closest to the point of injection benefit first, acquiring assets before prices fully adjust. Wall Street’s position at the nexus of these flows confers a structural advantage.
A monetary system with a natural cap on supply, such as gold, would limit the discretionary expansion of the money supply and therefore weaken these detrimental effects, reducing the capacity of financial institutions to benefit from early access to newly created funds.
Finally, there is the matter of governance.
A fiat monetary system requires continuous management – rate setting, balance sheet operations, regulatory adjustments – creating an environment in which proximity to policymakers is itself a source of advantage.
Taken together, these numerous interrelated factors explain why Wall Street’s resistance to money immune to manipulation is so determined.
The fiat system is not merely a neutral backdrop; it is an enabling condition for a particular model of finance, one characterized by leverage, liquidity, complexity, and close integration with the state. To replace it with a gold standard would not simply change the rules of the game. It would change the game itself.
Since the game is precisely what is in need of changing, Wall Street cannot be counted on to do anything to move the American monetary system towards the proper sound money standard we so desperately need – indeed, quite the opposite.
Img credit: Alex Proimos/Flickr
Joseph Solis-Mullen is a political scientist, economist, and Ralph Raico Fellow at the Libertarian Institute. He teaches history and politics at Spring Arbor University and economics at Jackson College.
