David Stockman's Delusions: The Gold Standard Is Still a Really, Really Terrible Idea … Barbarous relics are relics for a reason … Have we been living in some kind of economic hellscape the past 80 years? … Now, the past five years have been brutal. And the five before that weren't great, either. But it seems hard to argue that the U.S. economy peaked in any way back in 1933. Well, unless you're a certain kind of libertarian. The kind of libertarian who thinks we cast ourselves out of our economic Eden after we cast off the gold standard to taste the forbidden fruit of fiat money. In other words, a libertarian like ex-Reagan budget director David Stockman. The gold standard didn't save us from dystopia. The gold standard was dystopia. – Atlantic
Dominant Social Theme: Only central planning can save us.
Free-Market Analysis: Another day, another jeremiad from The Atlantic (which used to be a respectable thought publication) on the efficacy of political activism in the economic arena. It is truly tiresome after a while and, yes, it is easy to shoot down the idea of a state-controlled gold standard. But The Atlantic in doing so provides us with unintentional cognitive dissonance.
After all, the article argues for state activism in the economic arena while ignoring the activism of a state in a state-declared gold standard.
Here is the simplest and most powerful answer to the monetary conundrum: The market should set the value of gold relative to other items (or vice versa for purists) within a competitive venue. The Atlantic article excerpted above never addresses this argument.
When the United States initially fixed the value of silver relative to gold, it opened the possibility for all sorts of distortions and some inevitably took place when the supply of silver swelled because of discoveries in the 1800s. The fixed ratio unhinged the monetary system. Eventually (for various other reasons as well) silver was demonetized.
You will find none of this history in this article, which is determined simply to argue that market forces (or what the article considers to be market forces) are not appropriate when it comes to the serious business of building a monetary economy. Here is more from the article:
The gold-standard era was a time of more frequent recessions, more protracted recessions, and more severe recessions. In other words, the bad old days. Now, there isn't great annual data from before 1929 –that's when the concept of "GDP" was invented — but Measuring Worth does have reconstructed real GDP per capita figures going back to 1869 …
In a long and rambling piece that really defines the word "screed", Stockman inveighs against the Federal Reserve and deficit-spending for allegedly creating fake wealth and real bankruptcy. Rather than propping up our still-weak economy with monetary and fiscal stimulus, Stockman pines for what he imagines was, well, our golden age: the age of the gold standard and balanced budgets. It sounds plausible-ish– who's for more bubbles and more debt? — but it actually fails every test of logic and history.
The "golden" years were actually the greyest years, the worst years. The economy was in recession 52 percent of the time between 1874 and 1933. We've been in recession just 16 percent of the time thereafter …
This libertarian worldview is fundamentally a religious one. The Market metes out its punishment for our speculative sins with the quite-visible hand of recessions. And we must accept its judgment. Doing anything to avoid our penance is just blasphemy against the one, true faith.
This is simply an example, unfortunately, of defining an argument in a way that is most favorable to the rhetoric that will then be employed to attack it. The "gold standard" of the US's post-Civil War era – along with the rest of the post-war economy – was not in any sense a shining example of market forces at work. No economically literate libertarian would make such an argument.
An argument can be made that the pre-Civil War economy was more along the lines of a real free market but even there, banks were often constrained from offering more than one branch and bank founders were forced to by failing municipal paper as part of their charters.
The combination of branch instability and souring municipal bonds often led to bank runs, but this is something else that historians neglect to explain. Wildcat banking was an eruption of the standards under which private banks were forced to labor.
There is simply no doubt that monetary competition and free-market money works. It works much as the Invisible Hand itself works. Nobody in his or her right mind would seriously suggest these days that a nation's industry be monopolized and directed from the top down – and yet when it comes to money we are barraged by articles making exactly this point.
In a sense it is an academic argument because the system itself is becoming so rotten that it is becoming hard to see how the powers-that-be will retain the credibility to suggest alternatives, even the kind of gold standard that this Atlantic article disapproves of.
We may see a time when truly private monetary systems evolve out of the wreckage of our current facilities.