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Booms and Busts of the Gold Standard Era
Published : November 09th, 2012
796 words - Reading time : 1 - 3 minutes
( 4 votes, 3.3/5 ) Print article
 
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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 reasons,
none 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 action.

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 simple principles?

 

 

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Nathan Lewis

Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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