Turner Classic Movies ran the Wizard of Oz a couple of weeks ago and one of my kids Tivo’d it. This means that it gets played over and over again in my kitchen (where our TV is) as well as through my mind. Always alert to a supply-side teaching moment between the generations, I told my kids that the story is probably about the gold standard in monetary policy.

I’m not kidding; Frank Baum’s book was likely part of the populist wave of outrage against the gold standard, which many thought was destroying the American farmer. In the story, the way to get home was silver slippers — a symbol for using less-valuable silver as part of the currency mix. Unfortunately for the economics profession, ruby looked better in Technicolor, and the bimetallist message was lost in the film adaptation.

Since bimetallism in monetary policy has turned out to create a hopeless muddle of confusion wherever it’s been tried, the choice of ruby slippers turns out to have been a good directorial decision. But just because a gold standard (or some other commodity-based standard) is a good way to organize a monetary system doesn’t mean that it’s the best way to make predictions about a system that isn’t organized that way.

The point of a gold standard is to serve as a restraint on the power of central bankers: If they’re forced to purchase or sell gold for citizens at a fixed price they pay a penalty for poor money-supply management. Contractually, they end up obligated to sell gold for less than it is really worth. Ouch.

But the world hasn’t been on anything like a real gold standard for at least three decades, which means that the bankers of the world haven’t been constrained by the discipline of gold prices. Instead, they buy and sell the stuff at their whim and in unpredictable ways, driving the price both up and down. This creates confusion, and makes gold a less effective barometer of future prices.

Despite this, gold-standard advocates are today trying to make an ideological point about what monetary policy should be. They’re right; the gold supply would be a better anchor for our currency value than some bureaucratic guess. However, the way to make that point is not to enshrine gold as the one and only Polaris of the international monetary order.

If you want to get away from the ignorance of central planners, then look at all the inflation-sensitive markets. Otherwise, when central banks load up on or dump gold and create spikes and valleys in the gold price, and you treat those spikes and valleys as infallible, you will end up exactly where you didn’t want to be: having to make decisions about future inflation and the direction of the economy based on the whims of the government bureaucrats.

– Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom.