Thread: I consider a return to a gold standard neither desirable nor possible. But like too many who also reject the idea, Michael Hiltzik @hiltzikm is long on contempt for the idea, but short on understanding of the gold standard's actual record.latimes.com/business/story…
Hiltzik says that "On the far right, the gold standard era is cherished as a beacon of economic stability. Modern economic thought finds that to be the opposite of the truth." But one needn't be on the "far right" to see merit in the "classical" or pre-1914 gold standard.
That ca. 1871-1914 system did prove stable in certain obvious respects: indeed, it was the only regime ever to combine the features of long-run price level stability and fixed exchange rates. Keynes himself recognized these virtues.
True, there were periodic crises in some countries, including the U.S. But economic historians have shown that these were a result of nation-specific banking and currency laws. Virtual none, for example, blamed pre-Fed crises and resulting unemployment on "the gold standard."
Had gold been to blame for the financial crises of 1884, 1893, and 1907, Canada, which used precisely the same gold dollar and was otherwise heavily integrated with the U.S. would also have had serious crises in those years. It did not.
Hitzik dismisses the classical gold standards success by writing that this very success is "a clue to its unrecognized fragility — it worked until suddenly it didn’t anymore." But, just what conceivable efficient peacetime international monetary regime could have withstood WWI?
Hiltnik then writes that the classical gold standard's "downfall didn’t result merely from the fiscal pressures and political turmoil of the war, but from the growing recognition that the gold standard benefited one particular economic class." But this simply isn't so!
Had it been so, the leaders of the former gold-standard nations would not have struggled so mightily to restore their nations' gold standards, albeit with new arrangements meant to economize on gold and limit thereby the need for postwar deflation.
The resulting interwar gold "exchange" standard was indeed an unstable house of cards. But while it can be blamed for having triggered and deepened the Great Depression, its role in doing so in the US itself is controversial, to say the least.
Throughout the first years of the depression, the Fed held vast excess gold reserves. Even in early March, when the New York Fed asked the governor of New York to declare a state banking holiday so it wouldn't run out of gold, the Fed banks held $1 billion in excess reserves!
That's why Milton Friedman and Anna Schwartz blamed the "Great Contraction" not on the gold standard but on Fed inaction. Many researchers since have also argued that the Fed could have done much more to fight the depression without running out of gold.
Like many, Hiltznik blames Hoover for keeping the U.S. on the gold standard until March '33. But this, too, is poor history. It is more than a little doubtful that FDR himself would have taken the U.S. off under conditions that prevailed during most of Hoover's presidency.
Until March FDR himself had no definite plans to devalue the dollar, though he understood that he might eventually have no choice but to do so: his views on money and deficits and such were not especially unorthodox compared to Hoover's.
Ironically it was FDR's noncommittal stance on devaluation that ultimately helped make it necessary, by informing an international, speculative attack on the dollar, during the week just before he took office. That attack is what caused the New York Fed to seek a bank holiday.
Had Hoover magically found himself still president after March 4th, he too would have had no choice but to declare a national banking holiday while suspending gold payments. Indeed: the plan for doing these things that FDR himself used was mostly concocted by ex-Hoover men.
So was the plan for reopening the banks. Even FDR's famous first fireside chat was based on a script prepared by a Hoover official. (FDR himself added many of the better flourishes, but changed little of the substance.)
Even so it wasn't until January 1934 that FDR officially devalued the dollar, having previously settled for merely suspending gold payments and then letting the dollar "float."
Hiltzik observes, correctly, that "After World War II, economic policymakers struggled to find a version of the gold standard that would work in the modern world."
He doesn't say that they (including Keynes and Harry Dexter White) did so because they believed "that the gold standard benefited one particular economic class." Instead they were after international monetary stability.
Ultimately their efforts gave rise to the Bretton-Woods System. It, too, would prove unsustainable. But that didn't make its architects bad economists or ones who didn't mind recessions and unemployment or who cared only for wealthy plutocrats!
It's true, of course, that since the passing of the Bretton-Woods era, no serious attempts have been made to revive any sort of gold standard, and that few economists now thing any such attempt worthwhile.
But that hardly makes occasional exceptions to the rule (Robert Mundell especially comes to mind) worthy of contempt. Nor does a straw poll of economists--most of whom were not experts on monetary economics or history--prove much.
I don't mean to compare Judy Shelton with Robert Mundell (though he has certainly been an influence), let alone to be taken to be either weighing-in on her overall qualifications or supporting any plan for revising the gold standard.
But if such plans are often not only ill-advised but ill-informed, many criticisms of the gold standard are also ill-informed. Let's by all means not let the gold standard's fans mislead us about its virtues and drawbacks. But let's not let its many critics mislead us, either.
(That was a lot in those days, BTW!)
P.S. Mr Rattner, writing in the NYT, is no better: nytimes.com/2020/07/22/opi…
Sorry: Hlitzik!
