Booms and Busts of the Gold Standard Era
November 1, 2012
(This item originally appeared in Forbes.com on November 1, 2012.)
The Keynesian economists claim that gold standard systems have
historically caused “booms and busts.” Recently, I asserted that no
major economic event was caused by a currency of stable value. The
purpose of a gold standard system is to provide a currency of stable
value – as stable as can be attained in our imperfect world – and,
for the most part, it achieved this goal over a period of centuries.
Did “booms and busts” take place during times when a gold standard
system was in use? Of course. These were caused for all manner of
of which include a currency that was stable in value.
What gold standard critics are really talking about when blaming
gold for “booms and busts” is that a gold standard system prevents
“macroeconomic management” via currency manipulation. These
economists are convinced that they could deal with any sort of
economic problem with their funny money toolkit.
If there was a recession in 1854 or 1960, for whatever reason, they
assume that the recession could have been completely avoided if they
had been allowed to apply their fiat money magic. They thus blame
the gold standard systems of the time for preventing any such
The recession was the gold standard’s fault!
Is “macroeconomic management” via money-jiggering such a magic
cure-all for economic ills? The soft money guys have had the freedom
to do what they like since 1971. Recessions still happen
anyway. For the last several years, Ben Bernanke has been
trying to make a housing bust, bank insolvency and unemployment
problem go away with an “easy money” strategy whose aggressiveness
is unprecedented in U.S. history. It hasn’t worked; all the
improvement in unemployment over the past several years can be
attributed to “statistical interpretation.”
Veterans of past recessions, in 2001 or 1992, probably remember then
that the economists would blame “pushing on a string” or all number
of other reasons why their tricks didn’t work. Again.
The conservative gold standard advocates are sometimes accused of a
“do nothing” approach to economic downturns. This criticism is often
justified. Often, very real problems have gone unaddressed, while
the gold standard advocates spout “it will all get better
eventually” fantasies. Sometimes, the conservatives themselves have
blown up their economies, by recommending fiscal “austerity” or a
crippling tariff war.
We can still address economic downturns with decisive
and effective government action. However, this should be
aimed at creating fundamental improvements, rather than trying to
apply an “easy money” solution to problems that have non-monetary
causes. Don’t mess with the currency. It will cause more problems
than it solves. Often, it doesn’t solve any problems at all.
All of these money manipulation techniques basically amount to forms
of currency devaluation, even if that is not their overt goal.
Over time, the currency loses value. Today’s dollar is worth only
about 1/1700th of an ounce of gold. In 1970, it was worth 1/35th.
Four decades of “easy money” in the face of economic problems has
reduced the dollar’s value by a factor of forty-eight!
When the value of money declines, the value of wages paid in that
currency declines too. This is offset over time by rising nominal
wages; but it is rarely offset entirely. Over time, people
become poorer. The long-run result of these currency
manipulation games is broad
impoverishment. That is a major reason why the average
American family feels poorer today than the average family of 1968.
When your money has only 1/48th of the value it did in 1968, you
need more of it to pay for the things that we have become accustomed
to. Mom has to go to work, and still there is not enough, so out
come the credit cards, student loans, auto loans, and so forth –
until not even that works anymore, and the American family has to
face its unfortunate financial reality.
Maybe four more decades of fiat money would see the value of the
dollar decline by another factor of forty-eight. The dollar would be
worth only 1/2304th of its 1965 value. Try to imagine what the
economy, and the American family, would look like then. The price of
a gallon of gasoline might be forty-eight times higher, around $192
per gallon. Would wages also rise 48 times? I don’t think so.
The value of the dollar will go down, and alongside it the
livelihood of the American family, until we figure these things out.
It might take a long time. Argentina has been experimenting with
low-quality currencies for a century, and keeps getting the same
results. Argentina used to be one of the wealthiest countries in the
world. Today, it is not even considered an “emerging market.”
Will it take Americans a century of decline to figure out these