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
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
Will it take Americans a century of decline to figure out these simple