Author and Bloomberg columnist Amity Shlaes defends the performance of the gold standard from mainstream critics.
The record of gold’s performance in all economies over the past century is not all “terrible.” Especially not in relation to areas that concern us today: growth, inflation or the frequency of bank crises. The problem here may lie not with the gold bugs but with those who work so hard to isolate them.
Gold’s Real Record
Conveniently enough, the gold record happens to have been assembled recently by a highly credentialed team at the Bank of England. In a December 2011 bank report, the authors Oliver Bush, Katie Farrant and Michelle Wright review three eras: the period of a traditional gold standard (1870-1913); the period of a gold-standard variant, the Bretton Woods gold-exchange standard (1948 to 1972); and a period of flexible exchange rates (1972-2008).
The report then looks at annual real growth per capita worldwide, over many nations. Such growth, they find, was stronger in the recent non-gold-standard modern period, averaging an annual increase of 1.8 percent per capita, than in the classical gold-standard period before 1913, when real per- capita gross domestic product increased 1.3 percent annually. Give a point to the gold disdainers.
But the authors also find that in the gold exchange standard years of 1948 to 1972 the world averaged annual per- capita growth of 2.8 percent, higher than the recent gold-free era. The gold exchange standard is a variant of the gold standard. That outcome doesn’t tell you we must go back to the gold exchange standard yesterday. But it does suggest that figuring out how the standard worked might prove a worthy, or at least not a ridiculous, endeavor.
Gold shone in other ways. In a gold-standard regime, money is backed by gold, so it’s impossible, or at least more difficult, for governments to inflate. Naturally the gold standard and Bretton Woods years therefore enjoyed lower rates of inflation compared with the most recent era. The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods.
“Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives,” wrote Bush, Farrant and Wright.
Stable Markets
Markets and countries enjoyed relative stability in gold- standard years, and capital in those years flowed to worthy growth-generating projects. The main sacrifice in gold regimes that the authors identify is that governments lose authority to micromanage domestic economies. But given governments’ records, that may not be such a bad thing, either.
The gold standard essentially distilled or detached money from politics, by placing tethers on the spending abilities of politicians.
And this has been the key reason why politicians, their allies and captured institutions everywhere have worked fervently and in complicity to mangle or contort gold’s relatively better track record and or even discreetly attempted to expunge gold’s role from the pages of history books.
As the champion of sound money Professor Ludwig von Mises once wrote,
The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money. Viewed in this light, the gold standard appears as an indispensable implement of the body of constitutional guarantees that make the system of representative government function.
The mainstream may deny it, but the way governments, through central banks, have been rapidly and intensely emaciating (or put bluntly destroying) their currencies, we shouldn’t discount that prospective reforms to the current US dollar standard system could partly include the return of gold, or that gold may play a bigger role in the monetary system.
Former World Bank President Robert Zoellick suggested this in 2010, but he may have been pressured by some quarters that prompted for a swift abdication of his earlier position.
Nevertheless the only way to bring back stability is to depoliticize money. This could be attained by first removing the monopoly privileges of government over money and by allowing for currency competition. So markets will determine whether gold will reassume its role or whether other forms of currency systems will emerge.
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