The Gold Standard and Full Employment

The very heart of the matter of the gold standard resolves to one very simple, and critical, issue.

Is the gold standard good or bad for the creation of abundant good jobs, and, thus, good for working people and the middle class?


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Much of the resistance to the gold standard derives directly from its reputation having been tarnished by its faulty resumption in the aftermath of World War I.

The carnage of "the Great War" -- in the early stages of which the gold standard had been abandoned as an expedient of financing the war.  After long dithering, and upon the recommendation of Bank of England governor Montagu Norman, in 1925 Chancellor of the Exchequer Winston Churchill restored the definition of the pound sterling at the same value as at the beginning of the war -- even though the price level had, approximately, doubled. A massive recession ensued, anticipating (and perhaps providing a significant contributing factor) to the Crash of 1929 and the ensuing Great Depression.

Defining the value of the currency at an excessive amount (in order to attempt to maintain London's status as the world financial center, a status that had been shattered -- making a migration to Wall Street inevitable), threw a million laborers out of work. The Great Depression itself was alleviated only by FDR's comparable revaluation of the dollar (as guided by agricultural economist George Warren) from $20.67/oz to $35/oz, an adjustment also required by the rise in commodity prices.

In Great Britain, the Macmillan Committee was convened to investigate the causes of the depression.

Economist David Glasner, of Washington, DC, publishes a consistently perceptive blog entitled Uneasy Money: Commentary on Monetary Policy in the Spirit of R.G. Hawtrey.  Sir Ralph George Hawtrey was, as noted in the Wikipedia, "a British economist and close friend of John Maynard Keyes, who held the  "view that the Great Depression was largely the result of a breakdown of the international gold standard. He had played a key role in the Genoa Conference of 1922, which attempted to devise arrangements for a stable return to the gold standard."

In a recent article, Dr. Glasner writes;

The tension between these two friendly rivals [ed. note: Keynes and Hawtry] was dramatically displayed in April 1930, when Hawtrey gave testimony before the Macmillan Committee (The Committee on Finance and Industry) established after the stock-market crash in 1929 to investigate the causes of depressed economic conditions and chronically high unemployment in Britain. The Committee, chaired by Hugh Pattison Macmillan, included an impressive roster of prominent economists, financiers, civil servants, and politicians, but its dominant figure was undoubtedly Keynes, who was a relentless interrogator of witnesses and principal author of the Committee’s final report. Keynes’s position was that, having mistakenly rejoined the gold standard at the prewar parity in 1925, Britain had no alternative but to follow a policy of high interest rates to protect the dollar-sterling exchange rate that had been so imprudently adopted. Under those circumstances, reducing unemployment required a different kind of policy intervention from reducing the bank rate, which is what Hawtrey had been advocating continuously since 1925.

In chapter 5 of his outstanding doctoral dissertation on Hawtrey’s career at the Treasury, which for me has been a gold mine (no pun intended) of information, Alan Gaukroger discusses the work of the Macmillan Committee, focusing particularly on Hawtrey’s testimony in April 1930 and the reaction to that testimony by the Committee. Especially interesting are the excerpts from Hawtrey’s responses to questions asked by the Committee, mostly by Keynes. Hawtrey’s argument was that despite the overvaluation of sterling, the Bank of England could have reduced British unemployment had it dared to cut the bank rate rather than raise it to 5% in 1925 before rejoining the gold standard and keeping it there, with only very brief reductions to 4 or 4.5% subsequently. Although reducing bank rate would likely have caused an outflow of gold, Hawtrey believed that the gold standard was not worth the game if it could only be sustained at the cost of the chronically high unemployment that was the necessary consequence of dear money. But more than that, Hawtrey believed that, because of London’s importance as the principal center for financing international trade, cutting interest rates in London would have led to a fall in interest rates in the rest of the world, thereby moderating the loss of gold and reducing the risk of being forced off the gold standard.

This analysis (and the transcript of the accompanying colloquy reported in Uneasy Money, is technical, yet provides important historic light on the essential question:  "Hawtrey believed that the gold standard was not worth the game if it could only be sustained at the cost of the chronically high unemployment that was the necessary consequence of dear money."

This is a proposition with which the chief modern classical gold standard proponents -- such as Lewis E. Lehrman, founder and chairman of the Lehrman Institute -- are in perfect and consistently outspoken agreement.

The data are persuasive that it was not the classical gold standard -- which had ceased to function shortly after the outbreak of World War I -- to which the misery of high unemployment is to be attributed.

It is to the mismanagement of the reintroduction, by the misdefining of the currency at pre-war values and the mismanagement of the reintroduction represented by the Genoa Conference and the implementation of the "gold-exchange standard," which caused the Great Recession of 1925 and the Great Depression of the 1930s.

This critical distinction was noted by no less a figure than then-Professor Ben Bernanke, writing with Prof. Harold James, in a 1990 NBER working paper, observed: "Recent research has provided strong circumstantial evidence for the proposition that sustained deflation -- the result of a mismanaged international gold standard -- was a major cause of the Great Depression of the 1930s." Full employment of course can be threatened by mismanagement -- of a gold-exchange standard as of a fiduciary dollar standard.

Yet the true gold, classical, gold standard (as opposed to the gold-exchange standard) while imperfect is easy to manage and difficult to mismanage.

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