No Economic Crisis Was Ever Caused By Stable Money
October 14, 2012
(This item originally appeared at Forbes.com on October 14, 2012.)
There aren’t many blanket statements you can make about economics.
Usually, “it depends.” But, there’s one thing I can say with a
fairly high degree of confidence:
No economic crisis was ever caused by stable money.
For some reason, the gold standard system has gained a reputation
for causing crises. This is mostly from the Keynesian camp: they
need floating currencies to play their funny money games. The
purpose of funny money is to solve some kind of problem whose
fundamental cause is typically not monetary at all. For example, we
are now in a process of trying to solve a bank insolvency crisis, an
unemployment problem, and a fiscal deficit problem, with a monetary
The purpose of a gold standard system is to produce stable money.
Nobody has found a better way to do so. For the most part, it works.
So, how does this gold-based stable money cause a crisis? It
Of course, many crises happened during the gold standard era, before
floating currencies appeared in 1971. In the two centuries before
1971, people got into financial trouble for all kinds of reasons.
Banks lent money to people that couldn’t pay it back. Businesses
invested in ideas that turned out to be not so hot. Governments
borrowed and spent more than they should have. Destructive domestic
tax increases were imposed. Countries got into tariff wars with each
other. There were even a few World Wars, Civil Wars, communist
revolutions, and so forth.
None of them were caused by money that was too stable.
Quite a few monetary crises and problems emerged too, mostly due to
an unstable currency, or the threat that a currency could become
unstable. During the 1890s, for example, the U.S. financial system
was chronically unsettled by various threats to devalue the dollar
by about 50% via the “free coinage of silver,” as the Democratic
Party demanded. There was a Panic in 1873, which happened while the
dollar was a floating currency, before it was relinked to gold in
1879. The Panic of 1819 came about in the aftermath of a floating
dollar during the 1812-1818 period, which was the result of the War
of 1812 with the British.
When a currency was floated and devalued, typically as a consequence
of wartime, it was common in those days to then raise the currency’s
value back to its prewar parity when reinstating a gold standard
system. This policy has advantages and disadvantages; one
consequence can be a recessionary tendency as the currency’s value
rises. This was particularly true in Britain during the 1920s –
although the difficulties of that time were as much due to the very
high wartime taxes imposed during World War I, which were never
reduced afterwards. This was another unstable money problem – the
devaluation of the currency during wartime, and then the raising of
the currency’s value afterwards.
Sometimes, there can be a problem when another country devalues.
This was the case in the early 1930s, after the British pound, the
world’s premier international reserve currency, was devalued in
September 1931. This immediately made British exports cheaper, and
also made British workers poorer, since their wages were devalued.
The effect on countries which did not devalue their currencies was
that their exporters had additional difficulty, while their domestic
businesses were flooded by cheap imports. It was called “beggar thy
neighbor” devaluation at the time, for that reason. Since this
problem is caused by the devaluing country, it is another
In U.S. history, there were also a number of liquidity-shortage
crises, with the last in 1907 serving as the impetus for the
creation of the Federal Reserve. These crises were not caused by
money that was too stable in value, but rather a short-term
inflexibility of the base money supply around the harvest season.
The Bank of England solved this problem by 1866, and never suffered
another liquidity shortage crisis. It was solved entirely within the
context of the gold standard system. The U.S. never had another
liquidity-shortage crisis after 1907, but the dollar remained linked
to gold until 1971.
Since 1971, we’ve had a colossal number of crises worldwide that
have been caused by unstable money. The entire world had an
inflation problem during the 1970s, as the U.S. dollar was devalued
from $35/oz. of gold in 1971 to around $350/oz. afterwards. In the
1980s, all of Latin America erupted into currency catastrophe, and
spent the next decade in a debilitating hyperinflation. The 1990s
witnessed Japan destroy itself with a currency that rose and rose,
while all of the Soviet sphere collapsed into hyperinflation. Mexico
blew up again in 1995. In 1997-98, another round of currency
disasters swept through Asia, and also knocked out Brazil and
Russia. Argentina blew up in 2001. Since then, the world has been in
another round of currency depreciation, with the dollar’s value
sinking from the $350/oz. level to around $1700/oz. today. This will
not end happily either.
The characteristic crisis of the post-1971 floating currency era is
the crisis of unstable currencies. Eventually, people will tire of
these completely avoidable events. They will stop searching for a
way to solve nonmonetary problems with funny-money solutions. They
will return to the principle of keeping the currency as stable and
reliable as possible.
Why? Because stable money doesn’t cause crises.
At that point, they will begin a new search, for a way to accomplish
this goal. This search won’t last long, because before long they
will realize why their ancestors used gold standard systems for
hundreds of years. It is the best way to achieve the goal of stable
No economic crisis was ever caused by stable money. When you finally
decide that’s what you want, gold is your answer.