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The monetary Maginot of the Gold Standard
By Ambrose Evans-Pritchard Economics Last updated: August 29th, 2012
Some gold bugs – though not ones with historical memory – seem to have greeted Republican talk of a renewed Gold Standard with near ecstatic delight.
They need their heads examined. Gold must be free if it is to police the political class.
The beauty of gold is that it is a store of value beyond political or state control, or largely so.
It is a coldly disassociated asset based on atavistic attachment dating back thousands of years. It is common to mankind, and therefore nigh impossible to suppress. It is, to boot, a safe haven from tyranny, the portable wealth of persecuted peoples over the ages.
Once governments link their policies and fortunes to gold through a fixed system, the metal – or its owner – becomes prisoner of abuse.
The reason why Franklin Roosevelt confiscated private gold in 1933 is because the Gold Standard blocked his economic strategy.
The linkage to gold in the dysfunctional fixed-exchange dollar system of the interwar years is precisely what made owners of gold a particular target. It is why their wealth was "stolen".
Quite why gold bugs think that the Gold Standard prevents asset bubbles and excess debt is beyond me. The 1920s saw US debt levels surge to around 300pc to 350pc of GDP. It is very similar to what occurred in our own Noughties up to 2008.
This credit creation happened under the post-WWI Gold Standard. The massive build-up in Germany’s external debt in the late 1920s – so like the Spanish build-up under the D-mark Standard (ie euro) in our own era – was directly caused by the perverse mechanisms of the interwar gold system.
France and the US (both undervalued on 1920s gold) had to flood the deficit countries with loans to offset their trade surpluses. When they cut off those loans – as Germany has cut off loans to Spain today – the result was violent economic contraction in Germany.
Anybody who has read Barry Eichengreen’s "Golden Fetters" knows what happened thereafter. The Gold Standard transmitted the monetary crunch by the US Federal Reserve to the rest of the world.
The surplus states (US and France) kept monetary policy too tight. They hoarded gold rather than recycling to keep the global system in equilibrium. All the burden of adjustment fell on the struggling deficit states, forcing them to retrench ever deeper into a downward economic spiral.
Eventually it engulfed everybody, until the victims seized their chance to escape and regain monetary sovereignty. Only then could they recapture their own precious demand, for their own precious industries. Those that did so early – the UK and Empire, the Scandies – recovered quickly.
Those that clung religiously to gold deflation – one thinks of Pierre Laval’s deflation decrees in 1935, the year before it all fell apart – were among the biggest losers in the end.
As Paul Krugman says, Europe has replicated the worst features of interwar Gold with monetary union. EMU is a D-mark peg instead of a dollar peg. No matter. The mechanism of debt-deflation torture for entire societies is much the same.
You could say that human folly and wickedness debauched the beautiful Gold Standard in the interwar years, but to concede that is to concede the argument. It is to admit that gold does not in fact prevent politicians running amok. It is just another monetary Maginot Line.
Ah yes, but what about 19th century gold, the heyday of the global trade boom that ended in 1914?
It certainly worked better. Governments were smaller. The welfare expectations of democracy were lower, and a number of key countries were not democratic at all. It is was easier for the Bank of England to run a pure global system in concert with a handful of like-minded central banks.
But it did not lead to better growth or even to stable prices. The peak to trough oscillations in prices (inflation to deflation) were arguably greater.
As you can see from these two charts from the St Louis Fed (brought to my attention by Miguel Vascues at La Decadencia de Occidente), there were more recessions under the Gold Standard. Relapses were more common.
The dark blocks indicate recession. On this measure, the post-War era has been remarkably successful.
Click to enlarge
Click to enlarge
The charts use a different scale for the inflation index (which is how FRED does the data) so you have to look closely. What you see is that there were two nasty bouts of post-war inflation: the late 1940s and early 1950s (a crafty move to devalue the post-war debt); and the 1970s Phillips Curve blow-off (the High Keynesian heyday).
Other than that, the fiat-era price record has not been so bad. There have been no destructive plunges into deep deflation, which is when real trouble often starts.
By contrast, the Gold Standard saw multiple episodes of deflation, five between minus 10pc and minus 20pc.
If you go back further, you can see from this inverted chart that the real gold price has moved profoundly over the centuries in rhythm with the discovery of new mines.
Click to enlarge
Gold peaked in the High Middle Ages. It became abundant after La Conquista and the discovery of Peruvian and Mexican mines, setting off a wave of inflation in Europe.
It rose steadily again through the late 19th century, famously crucifying America’s farmers on a deflationary Cross of Gold. Hence the silver movement of William Jennings Bryan.
It has been all over the place since. It is precisely for that reason that Keynes proposed the Bancor in the early 1940s. It was designed to link currencies to a basket of commodities that better reflect the fundamental realities of the economy. It would be less deflationary in times of gold shortages.
The Bancor idea has been picked up by the Chinese central bank. It may yet fly.
Needless to say, the Republican gold demarche is unlikely to get off the ground. It is a sop to the Tea Party.
True Tea Party men and women are not taken in by such flummery. Gold needs no party endorsement. It shines alone.
The monetary Maginot of the Gold Standard
By Ambrose Evans-Pritchard Economics Last updated: August 29th, 2012
Some gold bugs – though not ones with historical memory – seem to have greeted Republican talk of a renewed Gold Standard with near ecstatic delight.
They need their heads examined. Gold must be free if it is to police the political class.
The beauty of gold is that it is a store of value beyond political or state control, or largely so.
It is a coldly disassociated asset based on atavistic attachment dating back thousands of years. It is common to mankind, and therefore nigh impossible to suppress. It is, to boot, a safe haven from tyranny, the portable wealth of persecuted peoples over the ages.
Once governments link their policies and fortunes to gold through a fixed system, the metal – or its owner – becomes prisoner of abuse.
The reason why Franklin Roosevelt confiscated private gold in 1933 is because the Gold Standard blocked his economic strategy.
The linkage to gold in the dysfunctional fixed-exchange dollar system of the interwar years is precisely what made owners of gold a particular target. It is why their wealth was "stolen".
Quite why gold bugs think that the Gold Standard prevents asset bubbles and excess debt is beyond me. The 1920s saw US debt levels surge to around 300pc to 350pc of GDP. It is very similar to what occurred in our own Noughties up to 2008.
This credit creation happened under the post-WWI Gold Standard. The massive build-up in Germany’s external debt in the late 1920s – so like the Spanish build-up under the D-mark Standard (ie euro) in our own era – was directly caused by the perverse mechanisms of the interwar gold system.
France and the US (both undervalued on 1920s gold) had to flood the deficit countries with loans to offset their trade surpluses. When they cut off those loans – as Germany has cut off loans to Spain today – the result was violent economic contraction in Germany.
Anybody who has read Barry Eichengreen’s "Golden Fetters" knows what happened thereafter. The Gold Standard transmitted the monetary crunch by the US Federal Reserve to the rest of the world.
The surplus states (US and France) kept monetary policy too tight. They hoarded gold rather than recycling to keep the global system in equilibrium. All the burden of adjustment fell on the struggling deficit states, forcing them to retrench ever deeper into a downward economic spiral.
Eventually it engulfed everybody, until the victims seized their chance to escape and regain monetary sovereignty. Only then could they recapture their own precious demand, for their own precious industries. Those that did so early – the UK and Empire, the Scandies – recovered quickly.
Those that clung religiously to gold deflation – one thinks of Pierre Laval’s deflation decrees in 1935, the year before it all fell apart – were among the biggest losers in the end.
As Paul Krugman says, Europe has replicated the worst features of interwar Gold with monetary union. EMU is a D-mark peg instead of a dollar peg. No matter. The mechanism of debt-deflation torture for entire societies is much the same.
You could say that human folly and wickedness debauched the beautiful Gold Standard in the interwar years, but to concede that is to concede the argument. It is to admit that gold does not in fact prevent politicians running amok. It is just another monetary Maginot Line.
Ah yes, but what about 19th century gold, the heyday of the global trade boom that ended in 1914?
It certainly worked better. Governments were smaller. The welfare expectations of democracy were lower, and a number of key countries were not democratic at all. It is was easier for the Bank of England to run a pure global system in concert with a handful of like-minded central banks.
But it did not lead to better growth or even to stable prices. The peak to trough oscillations in prices (inflation to deflation) were arguably greater.
As you can see from these two charts from the St Louis Fed (brought to my attention by Miguel Vascues at La Decadencia de Occidente), there were more recessions under the Gold Standard. Relapses were more common.
The dark blocks indicate recession. On this measure, the post-War era has been remarkably successful.
Click to enlarge
Click to enlarge
The charts use a different scale for the inflation index (which is how FRED does the data) so you have to look closely. What you see is that there were two nasty bouts of post-war inflation: the late 1940s and early 1950s (a crafty move to devalue the post-war debt); and the 1970s Phillips Curve blow-off (the High Keynesian heyday).
Other than that, the fiat-era price record has not been so bad. There have been no destructive plunges into deep deflation, which is when real trouble often starts.
By contrast, the Gold Standard saw multiple episodes of deflation, five between minus 10pc and minus 20pc.
If you go back further, you can see from this inverted chart that the real gold price has moved profoundly over the centuries in rhythm with the discovery of new mines.
Click to enlarge
Gold peaked in the High Middle Ages. It became abundant after La Conquista and the discovery of Peruvian and Mexican mines, setting off a wave of inflation in Europe.
It rose steadily again through the late 19th century, famously crucifying America’s farmers on a deflationary Cross of Gold. Hence the silver movement of William Jennings Bryan.
It has been all over the place since. It is precisely for that reason that Keynes proposed the Bancor in the early 1940s. It was designed to link currencies to a basket of commodities that better reflect the fundamental realities of the economy. It would be less deflationary in times of gold shortages.
The Bancor idea has been picked up by the Chinese central bank. It may yet fly.
Needless to say, the Republican gold demarche is unlikely to get off the ground. It is a sop to the Tea Party.
True Tea Party men and women are not taken in by such flummery. Gold needs no party endorsement. It shines alone.
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