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The Classical Gold Standard: Debunking Leftist Propaganda (Audio)

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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.”

15 11 10 Price-Inflation


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…”

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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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5 thoughts on “The Classical Gold Standard: Debunking Leftist Propaganda (Audio)

  1. Ray says:

    I have trouble believing that any sane person could still believe that moving away from a true gold standard into the paper junk today is the smart choice. I have no trouble with paper currencies as long it is backed up by gold. By that I mean whatever the gold price is we have that same amount of gold socked away in Fort Knox.
    The government should not by any means be able by law to print more paper currency than gold on hand for any reason period. The smart way would be a law forcing the government to actually print 20% less then the gold on hand and to save like the people use to do in this country. The country does have emergencies such as wars. That is another subject. The Federal Government was formed to protect the STATES. Not to give out welfare, build roads,give out money to bail out GMC or any other business. This is actually against the constitution. The money spent on wars should be only after the congress votes to do so. Let the states build the roads and do the other things if that is what the people decide.
    I blame the people of this country for letting this government get out of hand. Probably 75% don’t even know how many is in the Senate or the House Of Reps. This attitude has caused us to lose our freedoms and it will only get worse and people are to stupid to even know it’s happening right now as I write this and has been for many, many years. There are some that know but are powerless to do anything because there are so few. One of those people just passed away and that was Erwin Schiff. I am not quite as old as Erwin Schiff was when he passed and I am certainly not as wise about politics and Tax’es or the constitution as he but, I do believe the government killed him as sure as if they pulled the trigger. I wish I did have his knowledge. Should you not know of him, read his books.

  2. jrj90620 says:

    Too late to save the Titanic now.Most of the ignorant passengers want more icebergs.Best to just save yourself.

  3. Bodie says:

    What is the source for CPI in the chart before 1900? My understanding is that there was no credible data collection so that anybody can just make up numbers. The idea that prices didn’t rise in the centuries before the industrial revolution seems fairly reasonable but after that watershed event the idea is tenuous at best and data I’ve seen is never sourced.

  4. Larry says:

    This talk is all crazy. We have not been on a gold system for over 100 years and most importantly we are not going back. I know it’s required by the constitution but the constitution is paper just like our money, so to speak. In addition, our money is more then just paper. It is backed by the promise of GDP growth in the future, the building of schools, universities, factories, technology, hospitals, military goods, these things are the modern day version of gold and silver. Now I will agree that the system has been perverted and it’s going to fail and I agree that gold and silver will help those who have it to get through the carnage ahead. It’s time to stop all this talk about going back to gold. That’s not going to happen until this system has been flushed down into the sewer. So, just buy the gold and silver you can and lets stop talking about this and let the system go under. People can have all the gold backing they want any time they want by buying gold themselves, thus creating their own gold standard. Time to just shut up about it and do it if for those who feel they must. I don’t care about those who choose to ignore what is going on. Those who understand need to stop trying to convert Keynesians, just let them die out.

  5. Arthur says:

    There was not formal data collection as such, but there are a lot of old records from times throughout history, that had some details of trading, that included prices paid for items… As one gets closer and closer to modern times the numbers of available records gets higher… Some are formal records like shipping and warehouse logs, others are less formal like diaries and journals that mention transactions in passing…

    The two key points though are that while the picture is not as detailed as what we have today, the data is consistent, and is enough that one can get at least an approximate equivalent of today’s CPI and other economic indicators…. There is some ‘noise’ in the data, but the order of magnitude is clear enough that there isn’t much room for debate.

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