Let's Resolve the Gold Standard
November 21, 2015
(This item originally appeared at Forbes.com on November 21, 2015.)
Among the various things you hear about gold standard monetary systems
— the monetary approach that the United States embraced for nearly two
centuries — is the notion that it causes “inflation and deflation.”
(The Cato Institute’s George Selgin had a recent
discussion on this topic at Alt-M.org
This is a bit of an odd assertion, because the primary purpose of a
gold standard system is to prevent monetary distortion that comes about
by variance in currency value. (This monetary distortion is sometimes
labeled “inflation” and “deflation,” but those terms are so vague, and
used for so many different economic situations, that they are somewhat
useless for precise discussion.) If people thought gold wasn’t doing
its job properly, as a stable measure of value, they could have found
some other solution during the many centuries it was in use. They never
The first error that is made (often on purpose, for rhetorical effect)
by many economists is to claim that the “consumer price index” went up
or down or whatever during the 19th century. But, there was no CPI in
the 19th century.
Most economic statistics date from after the Great Depression.
Governments decided that they wanted to “manage” the economy, and to do
so they generated a lot of new statistics. The Consumer Price Index, as
we know it, began to be compiled by the Bureau of Labor Statistics in
1940. Prior to that, beginning in 1919, the BLS compiled a wholesale
price index, with backdating to 1914.
Before 1914, the most common price index referred to today is the
Warren Pearson Index, which is an index of raw commodity prices in New
York City (not nationwide), going back to 1750. Sixty-two percent of
the Warren Pearson Index consisted of food and farm prices. Building
materials (mostly lumber), fuel and metals added another eighteen
percent. The remainder was a smattering of textiles, hides and leather,
spirits and other minor items.
This was nothing at all like today’s CPI, which is dominated by things
like rent, healthcare, and education. Indeed, most of what the Warren
Pearson Index is composed of is expressly excluded from the “ex-food
and fuel” versions of the CPI today. The Warren Pearson Index most
resembles today’s CRB Commodity Index, which is highly volatile.
The second fallacy is to ascribe all changes in the Warren Pearson
commodity index to changes in the value of money (gold), rather than
changes in the value of commodities, as measured in a currency of
stable value. First of all, we should probably ignore the wartime
periods, notably the First World War and the Napoleonic Wars period
(1795-1820). You would expect that to affect commodity prices.
During times of peace, if the WPCI falls 20%, perhaps due to a large
crop of wheat and corn, we are told to assume that this means that
gold’s value increased by 20%, resulting in a monetary “deflation.”
This makes no sense at all. Maybe it was just a decline in the value of
corn, as measured in a currency of stable value.
We are also led to assume that this 20% decline in commodity prices is
supposed to be equivalent to the kind of economic event that might
cause a 20% decline in today’s CPI, which would be very dramatic. But,
that wasn’t the case at all.
In this discussion, the time period that tends to come under greatest
scrutiny is the period from around 1880 to 1910. Commodity prices did
indeed fall by a significant amount in the 1880-1895 period, such that
many farmers were struggling. In the presidential election of 1896, the
Democratic Party wanted to devalue the dollar by about 50% via “free
coinage of silver,” which would raise nominal commodity prices and
allow farmers to repay their debts more easily. The Republican Party
promised to keep the dollar’s gold basis. The Republicans won.
Thus, even in this time that people might heap the most blame upon gold
— as a standard of monetary value — Americans voted to keep the gold
standard, and discarded the arguments of the inflationists.
To put some numbers on it: In 1896, U.S. commodity prices (in terms of
gold) hit a low that was 33% below the average for the 1820-1880
period. (This avoids the Revolutionary War and the Napoleonic Wars
period 1775-1815.) That decline took place over sixteen years,
averaging a little more than 2% per year.
That might be a little troublesome. But, I would note that the CRB
commodities index just fell from a high of 313 in June 2014 to a recent
low of 183.60 – a decline of 41% — in just seventeen months.
We are accustomed to this. The kind of volatility that we see all the
time, in our floating-fiat world, was once-a-century stuff in the gold
Statistically, the standard deviation in commodity prices over a
one-year period was 16.17% during the floating-currency era from
1971-2012, and 8.59% during the gold era from 1750 to 1970. On an
apples-to-apples comparison, the floating fiat era has much more price
The 1880s and 1890s were a time of huge expansion in commodity
production worldwide. Vast expanses of the United States and elsewhere
were opened up with railways, which allowed shipping of farm products
outside the immediate local area. In the U.S., acres under production
soared. Between 1870 and 1895, total U.S. acreage under production for
the ten major crops rose from 109.6 million acres to 242 million acres
– a rise of 121%. In just one generation, the amount of land under
cultivation more than doubled. (That is why there were so many farmers
with mortgages in 1896.) However, growth soon slowed and then
flattened. In 1915, 298 million acres were under cultivation, an
increase of just 23% over twenty years. In 1940, it had actually fallen
back to 280 million acres.
Much the same thing was happening throughout the world, as new railways
and steamships allowed the expansion of commercial agriculture, mining
and forestry across vast swathes of Argentina, Brazil, southern Africa,
So, maybe it was just a case of capitalist overinvestment.
Overproduction and low prices resulted, investment and expansion waned,
and prices thus returned to their long-term averages. Maybe there
wasn’t any monetary element at all.
Since we are asked to imagine that these declines in 19th century
commodity prices are equivalent to the kind of economic event that
might make today’s CPI fall by 30% or more — a catastrophe! — let’s see
if there was any evidence of catastrophe.
During the 1880-1912 period, U.S. industrial production increased at a
compounded rate of 5.37% per year. Pretty good! This includes the
“deflationary” 1880-1896 period, when industrial production rose by:
5.35% per year. It was actually a bit better than the prosperous 1950s
and 1960s, when industrial production rose by 5.20% per year. And the
floating fiat era? From 1971-2012, industrial production rose by 2.30%
per year, with most of that during the “Great Moderation” period of the
1980s and 1990s, when the dollar’s value was stable vs. gold –
arguably, a crude sort of gold standard system. (I address many of
these topics in my book Gold: the Monetary
And what of the “one Fed-induced asset bubble after another” period of
2000 to the present? Over those fifteen years, U.S. industrial
production rose a grand total of thirteen percent. Under 1% per year.
Less than population growth.
It appears that the difficulties of farmers in the 1890s were not
shared by the economy as a whole – which suggests that it wasn’t really
a monetary event, but rather something related to commodity production.
Yes, it’s true that there was a major expansion in gold production
following some major finds after 1895. However, there was an
even-larger expansion in gold production after 1850, which didn’t
influence commodity prices very much. Even at its height, the post-1895
gold boom did not raise mining production to more than 3.5% of existing
aboveground stocks per year, compared to a long-term average around 2%.
Maybe it wasn’t important.
I am not the only one who has come to these kinds of conclusions.
Michael Bordo, John Landon Lane and Angela Redish, in a 2004 paper
the Federal Reserve Bank of Cleveland, found that:
“Our results show that the deflation in
the late nineteenth century gold standard era in three key countries
reflected both positive aggregate supply [commodity glut] and negative
money supply shocks [monetary factors]. Yet the negative money shock
had only a minor effect on output. … Thus our empirical evidence
suggests that deflation in the late nineteenth century was primarily
good. [The monetary factors, if they existed, didn’t matter.]”
Maybe the changes in commodity prices during the 19th century were just
… changes in commodity prices, measured in a stable unit of account.
And if gold, perchance, did not quite achieve this ideal of a “stable
unit of account,” maybe its deviation from that state of perfection was
minor enough that it didn’t really matter much.
The “worst case scenario” from the 19th century was actually pretty
darn good – better than anything that has been achieved with floating
fiat money since 1971.
Maybe that’s why people used gold as the basis for their money for the
past five thousand years.
Here for the Traditional City/Heroic Materialism Archive
Here for the How Banks Work series
Click Here for the NWE
Six-Month Ultimate Health and Fitness Program
13, 2015: Greg Ip Gets It Wrong: What a Gold Standard System Was, And
8, 2015: Money and Credit #1: Money
5, 2015: Intellectual
Support For Gold-Based Money Is Leading To Political Support
23, 2015: Russia's Central Bank Might Be Getting A Clue After All
11, 2015: Parks and Squares 4: Smaller Squares
1, 2015: Politics Vs. Reality In Monetary Reform
27, 2015: Sovereign Default and Restructuring
9, 2015: The U.S. Embraced A Gold Standard For 182 Years, So Why Is It
21, 2015: Three Things About The Gold Standard That Everyone Should Know
16, 2015: Parks and Squares 3: Squares
2, 2015: Parks and Squares 2: Smaller and Closer
31, 2015: Can a Government Finance Itself Simply By Issuing Money?
26, 2015: Parks and Squares
12, 2015: Greece Is On The Brink Of Disaster -- Or Raging Success
5, 2015: Audio 2015
25, 2015: Greece: Planning The Bank Holiday
20, 2015: George Gilder Joins Team Gold And Explains Where Friedman
7, 2015: The Bank of England, 1696-1914
5, 2015: Greece: It's Time For Your Default and Debt Restructuring