Tyler Cowen acknowledges that the gold standard as implemented in 1929-1932 was a disaster, and that a gold standard would also work very poorly in the presence of the big changes in the real value of gold over the last decade. But in the interests of promoting a balanced discussion, he asks:
Dare anyone critical of the gold standard bring themselves to utter these (roughly true) words?: “For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology.”
Here are my thoughts on Tyler’s question.
There was indeed spectacular real economic growth in the nineteenth and early twentieth centuries. But it is unnatural to me to suggest that the monetary standard was the key cause of this. Instead I would point to real developments. For example, U.S. production of crude petroleum quadrupled between 1868 and 1878 and doubled every decade after that up through 1915, thanks primarily to discovery of huge new fields as the industry expanded geographically (see Hamilton (2012)). By 1890, the U.S. had laid 200,000 miles of rail track, and that too was to double again by 1917 (see Historical Statistics of the United States, Table
Df927-955). Discovery of the steam engine, electricity, and machine tools were surely more important than monetary policy in determining the real growth rate for over a century.
The question should not be whether long-term growth occurred under the nineteenth-century gold standard, but instead whether the monetary system contributed to cyclical instability over that period. It is hard to make the case that it was helpful. The graph below plots short-term U.S. interest rates over the period 1857-1915. With some regularity, the cost of borrowing would spike up in dramatic financial events, as it did for example in the panics of 1857, 1873, 1893, 1896, and 1907.
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The NBER’s business cycle dates also characterize this era as experiencing economic recessions more frequently and of longer duration than observed since the U.S. abandoned the gold standard in 1933, with recessions usually following the financial panics.
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It is true that the biggest concern I have about going back on a gold standard today– that it would tie the monetary unit of account to an object whose real value can be quite volatile– was not the core problem associated with the system of the 19th century.
But the fact that this wasn’t the core problem with the gold standard in the nineteenth century does not mean that it wouldn’t be a big problem if we tried to go back to the system in the twenty-first century.
On the other hand, if you figure out some way to double U.S. oil production every decade for the next 40 years, I expect you’d see another golden era of economic growth, regardless of the monetary policy followed by the United States.
I don’t suppose we could prevail upon you to add GDP growth to those charts above. It’s mostly curiousity.
As for the oil comment, well, that’s suitably harsh. But will we see numbers to match the swag? Is this just a trailer, so to speak, for some upcoming analysis? I certainly hope so.
I think the more fair interpretation of Cowen’s comment would be to say that he doesn’t think a gold standard is incompatible with a period of advancement, not that it as the cause of it.
Pointing out what happened during that time period doesn’t tell us much though. The relevant question is, what would that period have looked like if we hadn’t been under the gold standard? Would it have been even better or worse?
I see a lot of crises, panics, depressions, etc. directly related to the gold standard and can’t help but think the better version of Cowen’s statement would be something like, “For the Western world 1815-1913 was arguably the greatest period of human advance ever, and may have been even better had we not been on the gold standard.”
I would suggest the bigger reason for the difference is the lack of understanding how to manage a fiat money system with floating exchange rates. But when most economics professors (you included) don’t get it, how do we expect those running the show to get it.
The period from 1815-1913 was also known for extreme drunkenness. (See the rise of the temperance movement for information about the explosion of available drink.) So by the same logic, we need only drink more to prosper.
We are everyday reminded causes and causations,everyday taught to select the right parameters and variables before affirming a relationships under the Granger causality.
Through several Econbrowser posts and comments we may have read that gold neither cured nor prevented wars,inflation,and that the gold price was not sensitive to none of these phenomena.
The abnormal extended growth cycles are contemporary and not past phenomena (Please see related Econbrowser post)
How about making an inventory of the sets of wrong doings from the administrations,violatons of the constitutional agreements,trespassing of the powers granted to the central banks, the relationship between the money supply and the loans and credit etc
Be it through gold standard or strict constittutional rules if and when administrations,governments central banks are willing to by pass the boundaries set by constitutional laws,if their admnistrations are willing to comply with ukase as opposed to reglementations, the real subject is no longer Marshall k but Martial courts.
As oil is so fungible now, I think it would make more sense to refer to a doubling of world oil production every 10 years…which would be great but for the thick smog and possible summer high temps in the mid 200s…
“On the other hand, if you figure out some way to double U.S. oil production every decade for the next 40 years, I expect you’d see another golden era of economic growth, regardless of the monetary policy followed by the United States.”
Also, you forgot the telegraph, the Erie canal, and the beginnings of electrification, radio, the telephone, and flight.
Culturally, well, not so much. There was the whole slavery and Civil War thing, leading to the Jim Crow era in the US, European colonization in Africa and Asia (though, of course, economically beneficial for white people), and the corruption of the old European monarchies, creating the conditions for WWI and the Russian Revolution. Also, the massive waves of migration from Europe to the US. I mean, my own great-grandparents came here to escape the cultural advancement of the Cossacks.
To add, we experienced perhaps the largest growth in prosperity under a pagan empire run for its greatest years by gay men (see Hadrian). This wealth was squandered under Christian rule. So should we not become gay pagans?
Cowen’s arguments don’t deserve more respect.
There was also settlement and development (for good and ill) of North America and Australia, bringing billions of acrees into Agricultural production, leading to a long term fall in real food prices that has probably only recently juste ended. In addition, millions of people, sometimes for good sometimes for ill, were taken from subsitence level agricultual work to industrial production with a massive increase in productivity. This, along with the Gold standard, lead to a steady deflation during much of the 19th century, which gave a sharp edge to debt and left much of the population impoverished as opposed to more equally sharing all that new wealth. (Although there is lots data on this, I expect the great fiction writers of the 19th century and early 20th ring true because of this fact (Balzac, Dickens, Thackeray, Zola, Dreiser, to name a few.)
Professor,
You approach this too narrowly. Stable currency values increase market efficiency. Resources are not wasted on hedges and traders will be more safe in making long term investments. Recall that in the 18th and 19th Centuries the UK issued British Consols, perpetual bonds. This could be done because of the gold standard.
In a world with no anchor to the currency all trades must be hedged especially long-term investments.
I would postulate that most of the innovations in the 18th Century were a result of a stable currency allowing resources to be turned from protection to production.
A currency is a tool not an end, and that tool is only as good as its stability, just ask Weimar Germany.
jonathan run for its greatest years by gay men (see Hadrian)
I wouldn’t want to go to far with the LGBT thing. The Empire didn’t do so well under Elagabalus. ;->
The far right’s craving for a gold standard seems to come from someplace deep in the reptilian part of the conservative brain. I think it’s part of this need for constancy or some unchanging north star that they can look to. In the conservative lexicon the worst thing you can call someone is a moral “relativist.” The conservative belief system requires some fixed point and it doesn’t matter whether we’re talking about morality, first principles in politics, creationism, inability to accept quantum physics, rejection of marginalist economics while still clinging to the labor theory of value, or the need for a gold standard. You see this with Bryce and his obsession with “honest” prices.
There are many problems with using the NBER business cycle calculations to determine recessions. It is based no monetary statistics rather than actual units of production. For example the late 1800s were a period of almost uninterrupted production but the NBER shows recessions.
Additionally, the interest rate is a price. If the interest rate is stabilized then it is equal to price fixing. Fluctuations in interest rates help stabilize the currency and properly allocate resources; fluctuations are not in themselves problems.
The problem you have in using historical analysis is that since the Federal Reserve was created and since the gold standard was ended in WWI we have experienced the worst economic disruptions in our nation’s history. Yet, as you have shown, when on the gold standard we had the greatest growth in our nation’s history. I will grant that there were many causes for this and not all monetary, but it seems pretty clear that using this as a judgment on the gold standard is a pretty strong endorsement.
Interestingly, if you make the calculation in terms of real per capita GDP growth rather than just real GDP growth was stronger after the US left the gold standard than while the US was under the gold standard.
Much of the growth in the 19th century was due to population growth rather than growth in living standards. In the 20th century much more of the growth stemmed from rising living standards rather than population growth. Choose your start data at 1914 for the creation of the federal reserve, 1933 after FDR raised the price of gold or 1950 and per capita gdp growth is stronger in the later period.
To reinforce what spencer noted above
Real GDP per capita from 1790-2010: 1.7%
1790-1900: 1.55%
1900-2000: 1.99%
2001-2010: .66%
Parsed by lifetimes, i.e. the traditional 3 score and 10 – I thought would be an interesting variant to look at the data from the perspective of the three lifetimes experienced in the US>
1790-1859: 1.38%
1860-1929: 1.64%
1930-1999: 2.45%
Baby boomers: 1946-2010: 1.9%
I wonder how much of Friedman & Schwartz’s “Monetary History of the United States” Tyler has read and digested. This May 2011 piece from BUSINESSWEEK describes his practice of ruthlessly skimming/browsing through books:
http://www.businessweek.com/magazine/content/11_23/b4231066695798.htm
Perhaps he browsed a wee bit too quickly through “Monetary History.”
I would only add two details
1. Just like dollars, gold served as the underlying for a host of derivative operations, whose upshot, with a few less customer yachts, built the ships that brought the rails that carried the wheat that transported the workers who built the guns, big etc.
We don’t have much use for gold anymore, as the underlying. Absolutely no-one should not have read Lawrence H. Officer, “Between the Dollar-Sterling Gold Points: Exchange Rates, Parity and Market Behavior” 1996.
2. Officer didn’t troll _all_ the records. What he missed is that London and the Bank of England served as the central switching point for both physical and financial gold through 1914. That probably dates to 1794 and Napoleon’s invasion towards Amsterdam. Before that, a dual, or should one say duel, between London and Amsterdam, having migrated most finally from Venice around 1600.
La Serinissima’s Ducats, gold then fine German silver, were made by the finest moneyers of the Age, meaning c. 1250-1600, as were the precisely manufactured BOE moneys the finest of their age.
Everyone who has read Lane and Lane and Mueller knows all this. And, those are the only people whose opinion matters. Those and Nicola Oresme.
Gold will always be a nice investment; but its utility in finance depended a> centralization of supply, and accordingly a strong underlying, especially because b> from Ducat to Sovereign, and long before, there was a symbolic “gold standard” underlying use in trade. And, to make matters more complex, these were practices of the state necessary to ensure their continuity as global emporia.
For the most part, the same kind of trustworthy standard of coined, or forged value (meaning melted and stamped) has been necessary for use of the metal in circulation and its derivatives. Eventually these things were melted down and put to other uses. Gold coin in circulation lost 3 percent/yr, so that was out as a standard. Any old standard coins were quickly removed from circulation if good or melted for jewlery. Google “Stater of Alexander” for an example.
And of course, for jewelry presently nobody has that kind of money. Eventually, things _might_ pick up and people actually think of celebratory consumption. Once that happens, the bubble will have to burst. Gold has to burst so people can wear it again. And, it will be made to burst if the fashionistas have anything to say about it; and they do.
The post WW-I gold standard was a disaster and should only be referenced as such. There were already other underlyings for prime derivatives, however f**** up their dealers.
Bretton Woods was interesting; and gold still serves as a quasi-money in the IMF. Unfortunately that is only useful if you buy a country.
I grew up during Bretton Woods, and remember it quite fondly. So, perhaps we should ask Hillary to set up a commission to investigate reinstituting Bretton Woods. Set a reasonable price for gold so people can wear it once again, say $350/oz. by 2020, as a middle-class standard around the world, and promise US investment to make it affordable to produce for the middle class again, will be exempt from the requirement, after 2020, capital gains on gold $350 basis.
Of course, at that price, and a little justice, $350/oz would be pretty good for miners, who once peace is declared and the world’s supply mechanism is reactivated, miners, if not their present owners, would probably live longer and prosper a little. Please anyone who knows the gold supply curve advise resp.
The panics and spikes in interest rates in the 19th century were the corrective busts which inevitably follow booms resulting from expansion of money and credit due to fractional reserve lending. If the banking laws and institutions drop required gold reserves from 40 to 20%, you’ll get a huge boom/ bust cycle under a ‘gold standard’; but don’t blame the problem on the watered down gold standard. There is no excuse to not understand this since the work of Hayek and others in the ’20’s. The economics profession pretends to not know this because they are well-paid apologists for the banker/ statist parasites who benefit from the paper money scam imposed on the masses.
Under the current system, the money supply is at least in theory ‘controlled’ by interest rates which can be manipulated by central banks through the so-called ‘printing’ of money.
Under the gold standard, gold rushes controlled the money supply.
And those massive infusions of currency caused bursts of growth and inflation, but during the periods between indebted farmers and workers struggled to merely live.
Seems to me that the more intelligent course is to have at least some modicum of control over the infusion of currency into the system. And, of course, I think I have history on my side, though, admittedly, I’ve not studied this too extensively.
I have always been amused when the anti-gold fanatics accuse those who wish to return to the gold standard of believing that gold is magic. Those who desire a return to the gold standard never claim that gold will stimulate the economy. Those who desire a return to a gold standard understand the true nature of money as a tool to facilitate trade. Those who promote a gold standard do not look to gold for prosperity but to improve the environment for the production of goods.
There have always been inflationists in history from the king who would debase his coins by clipping or mixing the precious metals with common metals, to the early American colonialists who worked for paper money issued by the state, to Lincoln’s greenbacks to pay for the Civil War, to the silver advocates of the late 19th Century. But each of these groups understood what they were asking for. They very clearly wanted to use money to lower their debts. They never expected money to magically create any goods and services.
Sadly, in the 20th Century the serious monetary work of Ludwig von Mises in his THEORY OF MONEY AND CREDIT and Knut Wicksell were ignored and John Maynard Keynes and Irving Fisher became the shamans of the new economics and monetary magic. Suddenly money was no longer simply a medium of exchange that facilitated trade but was a magic potion that when poured into an economy magically created more food, more goods and services, and more labor. But these magicians faced a very serious obstacle and that was the gold standard. The discipline of the gold standard would not allow them to pour unlimited amounts of currency into the economy to allow their magic to work, so they began to demonize the gold standard to remove the constraint on their religious rite of monetary expansion.
I encourage you to listen to contemporary critics of the gold standard with an open mind. What you will hear are claims of the magical powers of currency and you will hear that gold is evil because it will not allow them to call on these magical powers. Sadly, the serious analysts of monetary policy have been replaced with alchemists, false prophets, and charlatans. They write theological papers appealing to the power of money and warning of the demon gold.
The religious fervor is amazing. I guess it is not a surprise that the religious fanatic Williams Jennings Bryan has become one of their icons with his Cross of Gold. It is not the proponent of the gold standard who believes in magic but the modern inflationist with his magical QE infinitum to stimulate the magical production of goods and services.
Professor Hamilton —
You overlooked a simple answer to Prof. Cowen … he’s got his facts wrong.
Cowen’s gold-standard period (1815-1913) wasn’t “the greatest period of human advance ever, at least in matters of economics, culture, and technology”. The century since 1913 was, despite its lacking a gold standard.
The simplest evidence: economic growth (growth in real GDP per capita) has been much faster since 1913 than during Cowen’s period … both for the world as a whole(almost doubled), and for the US, Europe, Japan, China, India, etc. individually. And at the same time, the growth rate of world population almost tripled.
It’s almost like the world is a better place since the gold standard went away …
Source: Angus Maddison’s estimates of historical GDPs and populations.
2slug, the point is that people are throwing out hideous comparisons as though they are valid. That the gold standard drove a century of progress, that all the technological change unleashed in the 18thC can be tied CAUSATIVELY to gold should be labeled what is: just plain freaking insane. That is the kind of argument made by a high school junior who gets the multiple choice question wrong, as in: “what drove the 19thC’s technological gains” with 5 answers and (d) is “the gold standard” and Cowen picks that one. Even Jeff Spicoli would do better.
OT,
Dr. Hamilton, The Economist links to an interesting paper on the effects of monetary policy by William White.
This jives with many of the things I’ve said/felt over the past several years.
Highly recommended. It’d be good to hear your thoughts.
aaron
While we all quibble about the various system dynamics that are in play with the economies in history and the significant sectors and metrics, I opine that we are all still looking at the body of humanity through only a few facets. One must take into account all of these sectors, industries, technologies, policies, and metrics. It seems we are all prisoners in Plato’s cave and cannot know the truth that is revealed by the light of a more holistic awareness. It is perhaps why an economist can never be right all of the time. This is denied to us by the limited capacity of our individual selves in examining a gigantic systems comprised of billions of dynamic, free agents. Before we are able to examine large amounts of accurate data about the world and leverage computer systems to begin to efficiently analyze it, I think a more prudent, simplistic monetary policy is the best bet to provide something of an anchor in an often chaotic and dynamic economy. So, yes. Gold standard. It’s not the best, but we are yet incapable of even monitoring all the data and how they interrelate. Anything else is fancy speculation.
An interesting observation by Bill Cliinton as noted by Jeff Bell and Rich Danker.
For full disclosure I was not the first to come up with the understanding that the anti-gold advocates believe in magic. In The History of Money Jack Weatherford paraphrases the story of Mephistopheles (Satan for those who might not know) from Goethe’s Faust, Part II.
Faust and Mephistopheles visit the court of the emperor during the pre-Lentin carnival season of masquerades and tricks. The emperor is besieged by his treasurer and stewards reporting the lack of funds and the need to pay the wages of the soldiers and servants. His moneylenders demand payment on debts, and even the wine bill has come due.
Mephistopheles offers the emperor a way out of his financial mess. He has found the key to making gold, the secret that all alchemists had sought for centuries. He obtains from the emperor permission to print paper money-“the heaven-sent leaf.”
Faust comes to the emperor’s carnival ball dressed appropriately as Plutus, the god of wealth, and through magic, he and Mephistopheles show the emperor the riches he can have by printing money. … He has based the value of his money on the future mining of gold, the untapped treasures still buried in the earth. … The new money has been unleashed to the great joy of creditors, debtors, soldiers, and other citizens. Already people are ordering new clothes, and business booms for the butcher and baker. Wine is flowing freely in the taverns, and even the dice roll more easily. Priests and prostitutes scurry about their business with greater enthusiasm because of the new money, and even the moneylenders are enjoying a brisk new business.
…
At first, the spread of Faust’s new money brings happiness and improvement, but soon the hidden costs begin bubbling to the surface. … Soon social unrest in the newly enriched nation leads to rebellion, and a new anti-emperor rises to challenge the old one.
Robert Mundell enters the debate.
Excerpt:
Erratic currency value slides in 2008 were an under-reported catalyst of the recent financial crisis, Mundell said.
“The worst period in (economic) world history, I think, was the third quarter of 2008. The price of oil went from US$70 to US$148 and then down to US$33 and very quickly back up,” Mundell said. “What kind of global system is creating such crazy instability? We’ve got to do better.”
Judging from bullion prices, investors are increasingly turning to “in gold we trust.” In the past 10 years, an ounce of gold has gone from US$310 an ounce to about US$1,660, after peaking near US$1,900 last year. Most of those gains have come since the 2008-2009 financial crisis, ballooning from about US$900 an ounce in January 2008.
…But [Stephen] Leeb said that isn’t the whole story.
“Oil has gone from a low of US$10 to a current price of US$115 despite no major growth in major economic blocs during the last five years,” he said. “If you’re BHP and you have a US$100 marginal price for oil, how in the world are you going to develop iron ore five or six years from now? If BHP wants to be able to cost out what it’s going to cost them, they can’t do it in dollars.”
Mundell advocates a system that uses the value of gold to keep the U.S. dollar and the euro — the world’s two largest foreign reserve currencies — within a stable exchange range. Perhaps 20 years down the line, when the Chinese yuan is fully convertible, it could join the system. Regardless, “it’s very difficult to devise a (global currency) system that would be credible and would work without using gold,” Mundell said.
Or how about this?
For the Western world, the era of European Imperialism and Mercantilism, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology. So how about a return to the days of colonies and empires?
Going back may be a little more difficult as Belloc’s poem may not be so true today:
“Blood thought he knew the native mind;
He said you must be firm, but kind…
…He stood upon a little mound
Cast his lethargic eyes around,
And said beneath his breath:
‘Whatever happens, we have got
The Maxim Gun, and they have not’.”
I do want to make a comment on Mundell’s observation “The worst period in (economic) world history, I think, was the third quarter of 2008. The price of oil went from US$70 to US$148 and then down to US$33 and very quickly back up…” related to the NBER determination of “recessions.” In our modern world where we have a paper currency that can swing in value by a huge amount in one quarter creating both errors of inflation and deflation virtually simutaneously waiting to see the results from two consecutive quarters does not even come close to giving us an accurate state of the economy.
The NBER method was questionable when it first began to be used in the 1930s being based on Keynesian theory and today it is even more questionable.
Ricardo, thank you so much for the Clinton quote on the Gold standard. I’m absolutely giddy to throw it in some democrats faces!!!
I think we are being too self – absorbed in the view that the technological progress the US underwent in the 19th century may have been due to the gold standard.
That is just our own experience. Consider how much innovation and technological change is going on every day in China or India under fiat currency and industrial policy.
Have a billion people been lifted out of poverty by now? Very likely.
The Gold Standard is simply a relic of the times.
Simply looking at real GDP per capita numbers utterly trashes the idea that the 19th century was miraculous for growth.
This is not a major critique… However, U.S. rail mileage in 1890 was 167,191. By 1916 it was 266,031. See the 1917 Statistical Abstract of the United States.
David, Consider the emerging economies.
China has essentually fixed their currency to the dollar to prevent currency gains and losses with their primary trading partner.
India holds more gold than any country. This is primarily for jewelry but India’s use jewelry, essentially gold as an alternate currency. While their rupee is the official currency it has to compete with gold at a level.
Brazil had a seriously declining economy until they began to control their huge inflation problem.
Then consider Argentina as its currency crashes and the econoomy falls apart even though its natural resources are huge. Then consider Venezuela with its huge oil business and yet the country has lost its ability to feed its own people.
The emerging economies are learning the importance of stable currencies while America and Europe decline.
Watch Canada. They have seriously cut taxes and their currency is stable. Canada is beginning to become a more preferred trading partner than the US.
Currency value is not all there is but it is one economic unit that touches all other sectors and so has a broad impact when mismanaged.
Edmund,
Do not get sucked into the money illusion. Prosperity is not the amount of money you command but the resources. You cannot eat dollar bills. Consider the huge increase in units of production in the 19th and early 20th Centuries.
Peter,
If you look at the major economic declines in the 19th Century almost all of them were related to railroads. The federal government had massive intervention in the US rail industry. The transcontinental railroad essentially went bankrupt soon after its creation from massive subsidies from the government. A gross example is the crisis of 1873 when Jay Cooke was attempting a build the second transcontinental and was on the verge of receiving a $300 million loan from the federal government when the newspapers broke the news that he was essentially bankrupt. The governemnt was only days from making a massive mistake but it was killed.
Imagine if the government had granted the loan. Cooke and his friends would have paid their debts and then would have continued their errors in management. The government would have followed that $300 million with more because they woudl not want to fact the political consequences of making such a huge mistake.
This is the primary problem with central planning. The central planners will never admit it when they fail but will continue to throw more and more taxpayer money at failed projects. Consider the moderna Keynesians who will not admit failure but keep crying “just a little bit more.”
There has been NO change in the real value of gold over the last decade. Has there been some new industrial application which requires gold? Has the demand for gold jewelry changed? No. The currency is being debased, and the people are betting it will be further debased, driving demand for gold. Gold’s real value hasn’t changed one iota.
I was reading through a textbook my father used as a junior in high school economics in 1920 wherein it was stated, to the effect, that
“the slump of 1873 was due to the overbuilding of railroads during the previous 15 years”
The interest curves you show seem to bear this out: Interest 1860-1873 was considerably above the real growth equilibrium of about 4.7%. Railroads were a bubble at the time.