Keynesianism vs. the Gold Coin Standard
Tea Party Economist
by Gary North: The
Incomparable Faith of Keynesian Investors
Recently, the leftist London Guardian posted an
article against the nineteenth-century gold coin standard. The
author, who seems recently to have begun shaving, has provided a
highly useful summary of the Keynesian case against the gold coin
standard. His article is a fine mixture of familiar old canards
and creative new errors. His name is Duncan Weldon.
has not written a book, so it is difficult for me to know exactly
what his monetary theory is. He was the unknown Keynesian in the
2011 BBC debate between two teams of economists at the London School
of Economics: The
Keynes vs. Hayek debate. I assume that Robert Skidelsky, his
partner, thought he was an up-and-coming economist. Skidelsky is
the author of a multi-volume biography of Keynes.
I think it
would be a useful exercise to go through Mr. Weldon's case against
gold. Clearly, he expects people to take it seriously. While I cannot
bring myself to do this, having actually read it, I do think some
editor at The Guardian took it seriously, even though he
also read it.
BUGS UNDER EVERY BED
with an historical statement.
since Richard Nixon ended the convertibility of the US dollar into
gold in 1971, there have been calls for a return to some form of
gold standard. Proponents of this view, often known as "gold bugs",
want to see an end to paper money guaranteed by promises and for
currencies to once more be backed by precious metal. In the last
few years as central banks around the world have engaged in quantitative
easing to try and support their economies these voices have become
This is surely
comforting to any gold bug who is old enough to remember Nixon's
announcement, made when Mr. Weldon's parents were teenagers. At
the time, the number of gold bugs was limited to a handful of Austrian
School economists and a few elderly souls who could actually remember
the pre-1933 American gold coin standard.
Over the next
decade, the "hard money" newsletter industry blossomed in the United
States, but the number of gold bugs who had access to the mainstream
media was still not much larger than a few dozen people. I may be
exaggerating these numbers. I cannot think of any gold bug in a
professorial position in Great Britain.
RHETORIC OF CONTEMPT
the readers regarding the size and influence of the gold standard's
acolytes, he gets rolling.
specific appeal of gold can be hard to rationalise: it might be
aesthetically pleasing, but does that make it a sound basis for
a monetary system?
I see. Aesthetically
pleasing. It's a matter of taste. Nothing substantive, you understand.
Note: as a
debater for over 50 years, I recognize this tactic. When a debater
indulges in the rhetoric of contempt in his opening arguments, we
can be sure of three things: (1) he thinks he has the judges on
his side; (2) he has not got a strong substantive case; (3) he thinks
his opponent has only recently fallen off the proverbial turnip
I wonder if gold bugs just listened to too much Spandau Ballet in
I cannot say
that I am familiar with the Spandau Ballet. Wikipedia informs us
that it was a popular rock band in Great Britain. What it has to
do with gold eludes me. The phrase "too clever by half" comes to
Skidelsky argued that supporters of the gold standard have an almost
atavistic belief in its powers, rooted in the age-old worship of
I am quite
familiar with Skidelsky's work. He is an economist-turned hagiographer.
Of his eleven books listed in his Wikipedia entry, five are on Keynes.
None is on any aspect of economic theory, including monetary theory.
So far, in
his first two paragraphs, Mr. Weldon has used three examples of
rhetorical contempt, but no substance.
plays well in the debate societies at Oxford and Cambridge, but
it does not play well across the English Channel, let alone across
the Atlantic. Mr. Weldon is clearly uninterested in any audience
beyond Oxbridge and the Labor Party.
"DISASTER" OF FALLING PRICES
Here, he identifies
the enemy position of all Keynesians.
they tend to ignore is that the world has tried the gold standard
before and it was, in most respects, a disaster.
Here is a
statement. It is a conclusion. It is not an argument.
tried the international gold standard from 1815 until the outbreak
of World War I 1914, which was the greatest period of economic growth
in recorded history. The world of 1900 would have been unrecognizable
in its wealth for the masses by someone getting out of a time machine
activated in 1800.
present, as the economy grows and produces more goods the central
bank can expand the money supply to keep up with output. Under the
gold standard, as output increases, the money supply will be fixed
and with more goods but the same amount of money, prices will tend
tend to fall under the gold standard. The horror! Why, the whole
consumer price index would begin to resemble the cost of computing:
ever less expensive.
We must understand
Mr. Weldon's argument in the light of economic theory and economic
history since 1800. Economic theory teaches that economic growth
reduces the effects of scarcity. A world without scarcity would
be a world where demand and supply balance at zero price. Therefore,
when there is economic growth, we should expect to see a world in
which consumer prices are falling in the direction of zero prices.
The gold standard fostered a world which conforms to the traditional
call of economists, who preach the doctrine of salvation by economic
is appalled by such a conclusion. Why? Because it points to a very
great advantage of the traditional gold standard: reduced consumer
prices. So, he invokes falling prices as evidence of the gold coin
standard's disaster. He therefore implicitly invokes the good old
days: greater scarcity, greater poverty, and the all-round economic
misery, a la 1800.
I am not using
the rhetoric of contempt . . . yet. This really is the logic of
prices might sound like a good thing, and in individual cases they
often are, but a falling general price level is usually associated
with severe economic strains. Why buy anything today if it will
be cheaper next week? The end result tends to be falling output,
rising unemployment, falling wages and a large increase in the real
burden of debt.
When he says
"usually," he means usually since the end of World War I, in which
the gold coin standard was abandoned in the West, except in the
United States and the United Kingdom, 1925 to 1931, when Winston
Churchill unwisely re-established the gold standard at the pre-War
price, ignoring a decade of mass inflation. He did this for political
reasons. The fake exchange rate maintained the convenient illusion:
the fact that the men he and his colleagues who had taken
the nation into that disastrous war and then had destroyed the pre-War
pound sterling as an effect of their financing of the War through
currency expansion had not in fact ruined the pound.
economists now accept that both the Long Depression of 1873 to 1896
and the Great Depression of the 1930s were aggravated by the gold
standard. In the 1930s the sooner countries came off gold, the faster
of 1873 to 1896 was the single most productive economic period of
comparable length in mankind's history. In the section of Friedman
and Schwartz's book, A
Monetary History of the United States (1963), which the
Keynesian economics guild never cites, they proved this with respect
to the economic statistics of the United States.
As for economic
recovery after 1930, the main nation to recover was Nazi Germany,
which used monetary inflation, price and wage controls, rationing,
and violence against trade unions as the primary policy tools of
economic growth. The Nazi state held down nominal prices by the
threat of violence, thereby cutting real wages, so the statistics
looked like recovery. The story of this "recovery" is found in Adam
Tooze's book, The
Wages of Destruction.
KINDS OF DEMOCRACY
Here, he raises
the issue of democracy.
gold standard means that monetary policy and interest rates are
set to defend the value of a currency against a metal rather than
to reflect economic conditions in the country. As professor Dani
Rodrik argued last night, this is fundamentally undemocratic.
Here, we get
to the political heart of the debate. The traditional gold coin
standard transfers power over monetary policy to the broad mass
of citizens, who can start a run on the banks at any time if they
suspect that the central bank highly undemocratic is turning
to inflation as a way to fund the government's debt. It is the democracy
of the free market, and the democrats of the ballot box despise
this aspect of the free market. They want monetary policy controlled
by an alliance of central bankers, commercial bankers, and politicians,
who all want to run larger national government deficits without
raising interest rates.
of the gold standard are always defenders of the autonomy of central
banks from politics. This argument is correct. These banks are indeed
autonomous, or close to it. The central bank is the most undemocratic
official government institution in every nation. Calling for the
insulation of the central bank from politics is politically comparable
to calling for the secret police to be independent from politics,
except that the secret police only threaten a few thousand people.
The central bank's policies threaten the nation.
the real reason that the gold standard could not be resurrected
in a sustainable manner after its suspension [in] the first world
war was the extension of the franchise to incorporate the working
class. Once workers had the vote they were unlikely to support politicians
who continually put defending the value of money against gold over
defending the number of people in work.
class, through its ownership of gold coins, and its ability to cause
a run on the banks by withdrawing their money in small gold coins,
was in fact disenfranchised economically after World War I began.
They refused to return to the pre-War gold coin standard in 1918.
Politicians and bankers did not want to transfer this power back
to the masses. Once the central banks in every nation stole the
gold from commercial banks, who had stolen the gold coins of the
depositors by breaking the contracts of full gold coin redemption
on demand, the political elite never again let the masses have their
bankers have long hired bright young economics graduates of Cambridge
and Oxford to persuade the middle classes that fiat money creation
by a politically independent central bank was just what the nation
needed. The central bankers did the same in every Western nation.
course the gold standard had its beneficiaries, most notably in
the financial sector. Stable international prices and a very open
global capital market in the era of the classical gold standard
created a great environment for international bankers.
Here, he reverses
historical causation. It was the banking establishment that opposed
the re-establishment of a gold coin standard. Why? Because it reduces
the ability of the financial community to make massive profits through
fractional reserves. Fractional reserves provide the leverage that
makes large commercial bankers rich. This is why there is no such
thing as a commercial bank that has publicly promoted the gold standard.
The last major economist to be employed by a large commercial bank
to write in favor of the gold standard was Benjamin Anderson. Chase
let him write its newsletter. He left Chase and returned to teaching
before the outbreak of World War II.
the case for the gold standard simply does not stack up and yet
it still finds very vocal supporters. Fundamentally the case is
political rather than financial. Gold bugs want to see golden
handcuffs restraining the ability of central banks to intervene
and states to spend, they want to remove any vestige of political
control of the monetary system and fix it an arbitrarily chosen
shiny metal in order to let free market forces take over. It is
therefore no surprise that most gold bugs are to be found on the
Here, he finally
gets to the truth. The issue is indeed deeply political. Gold bugs
do indeed want to see golden handcuffs that restrain the ability
of central banks to inflate. They want to substitute economic control
by the masses who own gold coins for political control by an elite.
So, gold bugs are usually found on the libertarian Right.
is part of a long and distinguished tradition of economists who
spend their lives at the feet of central bankers, doing their ideological
work for the bankers in exchange for a few scraps that fall from
If you detect
the rhetoric of contempt creeping in, you are pretty observant.
men have baptized the state and the power of monetary debasement
as the way of wealth.
class needs its court prophets. Every banking establishment needs
politicians who do their bidding. Young men who are not good in
physics or chemistry or engineering see their career opportunities
at Oxford and Cambridge. They major in economics. The smart ones
become bankers. The less smart ones become economists.
The ones who
are not smart enough to major in economics major in politics and
hire the economists to tell the politicians what to think.
graduates who are not good enough to get hired by the big banks
go into financial journalism.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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