The True Gold Standard (Second Edition)
Key Writings: Domitrovic on the Gold Standard
Last week, the great international monetary conference of 1944 that went by the name “Bretton Woods” got a bit of a reprise. One of George Soros’ think tanks, the Institute for New Economic Thinking, held a confab for political economists and other big thinkers at the same place: the Bretton Woods resort in New Hampshire. The hotel there is where, in 1944, the U.S. convinced several dozen countries to commit to fixed exchange rates. This set the stage for the great post-World War II economic boom.
Last week in New York, a remarkable conference on the past, present, and future of supply-side economics took place. Among all the components of the Reagan Revolution, supply-side economics is unique in that many of the participants from the 1970s and 1980s were so young that they are still active today. Economists Arthur Laffer, Larry Kudlow, and Larry Lindsey, along with businessman Lew Lehrman and political activist Jeff Bell – the panelists at the conference – were all under forty a generation ago as they fired up the supply-side revolution. Their guiding light, the future economics Nobelist Robert A. Mundell – who sat for a Q&A session at the conference – was in his 40s as he wrestled the 1970s down. Mundell’s colleagues still refer to him as an enfant terrible.
At the conference, there was not much discussion of the marquee matters of the Reagan economic policy. There was but passing mention of tax cuts, deregulation, free trade, and the new federalism. The reason, a good one, is that these aspects of the Reagan legacy are secure, if not wholly in policy then in terms of the public mind. The sense today is widespread, and not only among conservatives, that tax rates can get so high as to be punitive; that the regulatory apparatus is more cost than benefit; and that trade is to be encouraged and spending discouraged.
This leaves one big thing about which there never emerged a rough consensus: the money system. Here the Reagan legacy is creditable – but also incomplete and not clear about its lessons for today.
The most pressing issue Reagan faced as he took office was the crazy inflation of the time. In the decade and a half before Reagan became president, the price level had tripled. The worst of it hit when Reagan was on his way to the presidency. In 1979, 1980, and 1981, prices increased by more than 10% each year. In 1983, Reagan’s third year in office, inflation got down to 3%, near its historical norm, and soon to 2%, a low level that has essentially held since. Without question, Reagan’s defeat of mega-inflation is one of the signal achievements of the modern presidency.
Graduate schools of government first began popping up around the time of the New Deal, when society became infected with the bright idea that scientific management could solve all of the country’s problems. Sometimes they had generic titles that reflected the well-intentioned tasks for which they were designed, as in Harvard’s “School of Government.” In other cases, the elevated sense of importance these institutions attached to the selfless work they did on behalf the American people demanded ennobling distinctions, and titles such as “school of public administration” if not “school of public and international affairs” seemed more becoming. At long last the University of Arkansas achieved rhetorical perfection when it opened the “Clinton School of Public Service” in 2004.
Public service. What’s that again? According to press releases from the Clinton school, it is dedication to professional advancement in view of the common good. The distinction implied is that in the private sector, things conduce to the good (if at all) rather by accident; whereas in the in the public sector, the good comes about because workers therein key on it.
Among the aspects of life that have been swept into the public from the private (or “real”) sphere in modern times – from trains to health care to science research – we must give special mention to money itself. In the 19th century, individuals could actually create valid US money. If you went to the treasury with a hunk of gold (and at times silver) which you had dug up somewhere, for a nominal fee the feds would give you $20 an ounce for it. And that $20 was not from an existing pile but was created on account of the new precious metal offered in exchange.
Hard to believe, isn’t it? The money stock was at the whim of…the public. Things changed in 1913 when the Fed came into existence and then in 1933 when the private ownership of gold was outlawed. Now the amount of money – in particular new money – in the economy was strictly a governmental prerogative. But how much to create? And who would make that decision? And why?
What’s the most famous line in the history of monetary policy? Surely the closing cadence of William Jennings Bryan’s speech at the 1896 Democratic convention: “We will answer their demand for a gold standard by saying to them:…you shall not crucify mankind on a cross of gold.”
The funny thing about this line is that for all its fame, we assume it proved a loser for Bryan and his supporters, the “Populist” wing of the Democratic party. After all, Bryan would lose the presidential election in 1896, and again in 1900 and 1908. Moreover, the gold standard remained official policy into the twentieth century, to the consternation of Bryan supporters, the prairie farmers who wanted easy money to buy farm equipment and land.
Last week on one of the better-read econ blogs, Scott Sumner’s Money Illusion, a post bore this title: “Have conservatives always been this anti-intellectual?” That’s a fifty-cent word, “anti-intellectual,” and it’s not bandied around these days very much, even within rarefied air.
BY BRIAN DOMITROVIC: