The Classical Gold Standard: Debunking Leftist Propaganda (Audio)
In a new podcast, Tom Woods tears apart an article from the liberal website Think Progress in which an amateur economist attacks the gold standard. Joseph Salerno (Academic Vice President of the Mises Institute) and Jeffrey Herbener (Associate Editor of the Quarterly Journal of Austrian Economics) joined Woods to counter the mainstream misconceptions of the gold standard.
Think Progress went so far as to claim that the gold standard is responsible for increased consumer price volatility. This is clearly wrong, which Woods proves with a single chart. Notice when consumer prices really start to skyrocket – right around 1971 when Nixon closed the “gold window.”
Perhaps the biggest misnomer Woods and his guests address is that mainstream economists universally discount the classical gold standard as a terrible system. Herbener points out:
Contrary to this being a fringe view, this is a pretty standard view among economists. You can even find articles written and published by authors at the Fed, published on their website that say basically the same thing – that under the classical gold standard there was the advantage of stability in maintaining the purchasing power of money…”
Highlights from the podcast:
Woods: I want to give you the basic complaint [against a gold standard], and that is that we had a system like this in the past, where the paper money was tied to gold. And the result was the Great Depression. So only an idiot would want to return to a system like that. How do you tackle that?
Salerno: The gold standard that we did have during the 1920s and after World War I was not really a gold standard. It was a very watered down version of the so-called classical gold standard in which gold was actually an anchor, actually restricted the amount of paper money that can be printed by the Fed or by the banks. And that was before 1914. But with the onset of World War I and the establishment of the Fed, the gold – all the bank’s gold and for the most part the gold of the people themselves – were concentrated in the Fed by law… Which mean that the Fed could print money – pyramiding – on top of the gold reserves. So you didn’t have gold as a restrictive mechanism against inflation…
Woods: The author here says that “the idea of sound money takes away the Fed’s ability to manage the value of a dollar. The supposed benefit of this is that your money’s worth is more real, because it is pegged to a shiny, rare metal.” Of course, this is a caricature. It seems to me that not the supposed, but one of the actual benefits of this, is that your money’s worth stays stable or increases. It’s not that it’s more real, or whatever… If I look at a market basket of goods in terms of a number of dollars in 1915 and compare to 2015, there’s no comparison at all. Surely that at least counts for something. There’s no acknowledgment of this – that people could buy roughly the same amount of stuff or even more over 100 year period under gold. Whereas now, under paper, if you had been an idiot and saved for the future just in paper, you would be completely ruined.
Salerno: Yeah, that’s true, absolutely. In the 19th century, prices from 1800 or so to 1896 fell by about 20%. In other words, a dollar bought 20% more, or roughly 20% more, in 1896 than it did in 1800. Whereas, if you compare the timespan that the Fed was in existence from 1914 until today – our dollar is worth about 4¢. In other words, the value of the dollar has declined by over 95%…
Herbener: It might also be added that contrary to this being a fringe view, this is a pretty standard view among economists. You can even find articles written and published by authors at the Fed, published on their website that say basically the same thing – that under the classical gold standard there was the advantage of stability in maintaining the purchasing power of money, even though it may have had empirical drawbacks compared to say Bretton Woods…
Woods: When you hear a quotation like that – that economists basically agree that the gold standard was a terrible mistake and thank goodness we don’t have it anymore – what is your response to that?
Herbener: This actually isn’t a fringe view. The Nobel Prize-winning economist Robert Mundell gave a talk at St. Vincent College in 1997, where I think the title of it was something like “The International Monetary System in the 21st Century: Could There Be a Role for Gold” or something like that. He makes out a case for some kind of role for gold in the international system of currencies. I think it’s just wrong headed, it’s factually wrong to make this claim…
Salerno: In the last 20-25 years there has been a lot of research on the gold standard. As Jeff mentioned earlier, mainstream economists admit that the gold standard was effective at restraining inflation. What they didn’t like, or what they claimed was a flaw in the gold standard, was the fact that it caused the real output to be volatile. In everyday language, that means it caused recessions. It caused more recessions and deeper recessions than would have been the case if the money supply was sort of managed by a central bank. But no one poo-poos the gold standard any longer. No mainstream, sane economist really does…
Woods: Here’s what he [Alan Pyke] says, “By moving off the gold standard, America gained the ability to manage inflation much more acutely. That’s important because volatile inflation makes the price of everyday goods and services bounce around wildly, which undermines economic security for consumers.” I’m going to put a graph of purchasing power, and we’re going to look at when it starts bouncing around wildly. You’ll never guess gentlemen – it’s not during the period of the gold standard… That statement is so dramatically wrong, so preposterously at odds with what we know. How does it get past the editors at Think Progress? …
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