Recent Arguments Against the Gold Standard

The Republican presidential primary contests of 2011-2012 brought renewed attention to the idea of reinstituting a gold standard.  At least four candidates spoke favorably about the gold standard.  One suggested a “commission on gold to look at the whole concept of how do we get back to hard money.”  The 2012 Republican Party Platform, adopted in Tampa, called for just such a commission, explicitly viewing it as a sequel to the U.S. Gold Commission of 1981: “Now, three decades later, … we propose a similar commission to investigate possible ways to set a fixed value for the dollar.”

The favorable attention to the idea of reinstituting a gold standard has naturally attracted renewed criticism of the idea from a variety of sources.  A writer for The Atlantic, Matthew O’Brien (2012), has expounded on “Why the Gold Standard Is the World's Worst Economic Idea.” Washington Post writer Ezra Klein (2012) has declared that “The problems with the gold standard are legion.”  On the more scholarly side, Federal Reserve Chairman and former Princeton professor Ben Bernanke, guest-lecturing at George Washington University on the history of monetary policy in the United States, in the words of the New York Times’ account, “framed much of this history as a critique of the gold standard, which was dropped in the early 1930s in a decision that mainstream economists regard as obviously correct, hugely beneficial and essentially irreversible.”  The well known UC-Berkeley economist Barry Eichengreen (2011) has offered “A Critique of Pure Gold.”

In a “Briefing Paper” published by the Cato Institute (White 2008), I addressed a number of then-common theoretical and historical objections to a gold standard, sorting those that have some substance from those that merely betray a faulty grasp of the relevant theory or history.  Here I update the effort by considering the arguments against the gold standard that have been made by economists and economic journalists since then.  Some of the less substantial arguments that I criticized in 2008 reappear in the recent literature.  Other recent arguments are novel to some extent, but not all add weight to the anti-gold-standard case.  Several authors identify genuine historical problems that they blame on the gold standard when they should instead blame central banks for having contravened the gold standard.

“Unfortunately gold standards are far from perfect monetary systems,” Bernanke told the students at George Washington University.  We can all agree that gold standards, being real-world human institutions, are imperfect.  There is no doubt that a well-trained academic economist can describe on the whiteboard an ideal monetary system that, through the flawlessly timed and flawlessly calibrated policy actions of a central bank, produces greater stability in the purchasing power of money than a gold standard does —or scores higher on whatever the economist takes to be the most decisive criterion— while sparing us a gold standard’s resource costs by backing the money with something much easier to come by than gold, namely nothing.  But different well-trained economists have proposed different criteria, and even a flawless central bank cannot pursue them all with one policy.

More importantly, fiat standards in practice have been far from perfect monetary systems.  We need to examine historical evidence if we want to come to an informed judgment about whether actual gold-based systems or actual fiat-based systems display the smaller set of flaws.  We need to recognize the variety of institutional arrangements that the world has seen under gold standards and likewise under fiat standards.  In particular, we need to distinguish an “automatic” gold standard system – like the classical gold standard in countries without central banks – from the interwar gold-exchange system that was managed or mismanaged by the discretion of central bankers. I find that the most automatic and least managed kind of gold-based system – a gold standard with free banking – can be expected to outperform a gold standard with central banking, and to outperform the kind of fiat monetary systems that currently prevail.

What follows are critical analyses of the leading arguments against a gold standard.  I spell out each argument as recent critics have made it, and evaluate its logical and historical merits.  I begin with the least substantial arguments, and proceed to the weightier.


Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

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