Friday , 26 May 2017

Economists Agree: The Gold Standard Is a Barbarous Relic that Belongs In the Dustbin of History! Here's Why

The gold standard is a solution in search of a problem. Actually, it’s worse than that. It’s a problem in search of a problem. Prices would have to fall a great deal if we adopted the gold standard today. In other words, it would turn the imagined problem of price stability into a real problem of price stability. And, of course, this ensuing deflation would send the economy into a death spiral due to still high levels of household debt. [Let me explain further.] Words: 910

 So says Matthew O’Brien, ( in edited excerpts from his original article*.
Lorimer Wilson, editor of (Your Key to Making Money!) and (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

O’Brien goes on to say, in part:

Economics is often a contentious subject, but economists agree about the gold standard — it is a barbarous relic that belongs in the dustbin of history. As University of Chicago professor Richard Thaler points out, exactly zero economists endorsed the idea in a recent poll.

What makes it such an idea non grata?

  • It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have — which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up.
  • When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It’s no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.

Why would anyone want to go back to the bad old days?

  • The gold standard limited central banks from printing money when economies needed central banks to print money, and
  • limited governments from running deficits when economies needed governments to run deficits.
  • It was a devilish device for turning recessions into depressions.

The answer is that some people aren’t worried about depressions. Some people are worried about inflation. Even when none exists. To them, these fetters are the feature, not a bug. It’s a simple idea: If governments can’t print or spend too much money, prices should be stable. Simple, but wrong.

Consider the chart below, which shows headline CPI inflation under the gold standard from June 1919 to March 1933*. Not exactly an, ahem, golden age of price stability.



The gold standard should guarantee price stability in the long run, but you know what they say about the long run — we’re all dead.

In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn’t just about avoiding inflation; it’s about avoiding deflation too. The gold standard wasn’t good at either — especially compared to our modern inflation-targeting system.

Consider the same chart of headline CPI inflation, this time since the Federal Reserve began quantitative easing in November 2008.



Now that’s what stable prices look like!

There’s been 23 times less variance in prices since the Fed started quantitative easing than there was under the gold standard. Read that again. There’s been 23 times less variance in prices since the Fed started quantitative easing than there was under the gold standard.

It’s hard to understand why conservatives have been so up in arms about quantitative easing when you look at the reality. Yes, the Fed has expanded its balance sheet to unprecedented levels, but if it hadn’t done that prices would probably be falling a bit now. How, however, will the Fed eventually mop up all this liquidity it’s created — hasn’t it lit the fuse of an inflation time-bomb? No. The Fed can increase the interest it pays on reserves, do reverse repos, or use term deposit facilities to prevent banks from lending out too much money, if it comes to that….

Whether it’s 1896 or 2012, it doesn’t make sense to crucify our economy on a cross of gold.


It’s not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically — meaning people could trade dollars for specie — but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.

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Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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