The True Gold Standard (Second Edition)
Key Writings: Domitrovic on the Gold Standard
In 2008, Ben Bernanke’s and Paul Krugman’s star former doctoral student at Princeton, the economist Gauti B. Eggertsson, published an article in the American Economic Review, the field’s top journal, on the manifest excellence of the New Deal of the 1930s. One of the claims: “1933-1937 registered the strongest output growth (39 percent) of any four-year period in US history outside of wartime.”
The cited source for this statement was the Office of Management and Budget, which does not maintain statistics on “output growth,” or GDP growth, from before 1929. It is not possible to use this source for a claim about “any four-year period in US history.”
As for databases that do include the whole run of U.S. history, those at measuringworth.com show an increase in national output of 43% from 1878 to 1882, a peacetime period.
Either 1933-37 was not the greatest peacetime four-year run of growth in American economic history, or the issue is unsettled, for lack of canonical sources. The untenable position was that presented in the AER. Not only is the 1933-37 claim probably wrong as a matter of fact; attached to the claim was a faulty apparatus of verification.
Chalk it up to yet another elision in the academic journals. But once these things are out there, they take on a life of their own, re-cited and re-enunciated as they are by readers and then their own readers and listeners in turn. I have certainly heard historians who teach considerable number of students approvingly quote Eggertsson’s claim about the supremacy of 1933-37 output growth.
In scholarship, often what happens is that stuff is put out there, it’s erroneous, it spreads, a mess results, and the mess has to be cleaned up. We seem now to be in mess stage about the macroeconomic quality of the New Deal.
Not everybody agrees on the causes of the Great Recession, but there is one verity that we all typically hold to: as the collapse really hit back in 2008, the United States stepped in big time to bail the financial system out.
Look at the charts, and you see what appears to be overwhelming evidence. A tripling of the money supply. TARP loans at $800 billion. (Nominal) interest rates lower than ever. Budget deficits past $1 trillion. All these things materialized in late 2008, just as the economy lunged into “freefall”—another security blanket of those who think they know the general outline of things in the annus mirabilis of 2008.
Here and there, voices have pointed out inconvenient facts. John B. Taylor, the Stanford economist, for example, has been mentioning for years now that the housing bubble popped in early 2007. The vaunted Case-Shiller index sure shows as much. It was in full-fledged decline throughout 2007, at no perceptibly greater rate than in 2008.
The next point Taylor will make is the obvious one: there was no Great Recession in 2007. Not even at the end: though the “official” dating of the recession now begins with December 2007, by the old simpliste definition of two consecutive quarters of negative growth, recession did not come till summer 2008.
The dollar—that thing the Federal Reserve has been printing like mad the last few years—is in one of the worst spells in its history, short, medium, and long-term. Against the world’s major currencies, the dollar’s rate of exchange is down 5% since the Great Recession started, 32% from the 2001 peak, and 15% from the stability achieved in the late 1980s and early 1990s.
This is not to imply that the world’s other major currencies are themselves paragons of value. Against gold, all currencies have suffered mightily. But the dollar is especially bleak. It’s devalued 80% against gold since the 1980s, most of that in the last ten years. All of this has basically shown up in the consumer price index. The cost of living is double what it was twenty-five years ago.
Remember when people were saying that the old Republican ideas, the venerable supply-side reforms that first made their mark in the Ronald Reagan era of the 1980s, were no longer relevant in terms of getting us out of our rut today, on account of their already having been made policy? It was only yesterday that we heard all this—in the campaign of 2012.
Cut taxes? Done plenty over the last thirty years by Reagan, even Bill Clinton, and then George W. Bush. Roll back regulation? Done again (and we apparently saw the fruits in the financial crisis). Sound money? Interest rates are undetectable these days, a tiny fraction of those Jimmy Carter conducted over to Reagan in the massive dollar crisis of 1980-81. Free up trade? We now live in a bewildering era of globalization!
These four things—low taxes, stable money, deregulation, and free trade—are known as the “four pillars of Reaganomics,” one of the classical statements of which the great supply-sider Arthur B. Laffer set down here.
All so quaint, aren’t they, applicable as they may have been to the challenges of a generation ago.
But wait…now in 2013, taxes have gone up, and President Obama insists that more increases must come; regulation, in the form of Dodd-Frank, the Federal Reserve’s new plenary powers, Obamacare, and EPA mandates, has taken a giant leap; dollar substitutes like gold have blown through the roof; and big dogs in international trade, Japan and the Eurozone, are contemplating such things as competitive devaluations and the possibility of a breakup into autarky.
The Republicans have put some serious oomph in their presidential campaign over the last month. First Mitt Romney picked Rep. Paul Ryan as his running mate, a move which not only fired-up a very good portion of the electorate, but by all accounts lifted Romney’s own spirits on the trail.
Now the Republicans have announced that they will make it part of their party platform, up for a vote at the Tampa convention this week, to officially look into putting this country back on the gold standard.
Win and win. The thing about these moves is that they respond precisely to the two things that have become the top concerns of the public as these unacceptable last four years have unfolded.
Now to be sure, the greatest worry of the American people today is that economic growth is horrendous and stands to remain so, just like in the bad old days of the 1930s. But concerns 1-A and 1-B have been these: the rapid growth of the federal government’s fiscal problem since 2008; and the stunning readiness over the same period of the Federal Reserve to debase the nation’s currency while keeping the biggest of the big financial shops in clover.
In Paul Ryan, he of the “roadmap” (towards fiscal solvency), we have a direct response to 1-A. And in the gold platform, we have the same toward 1-B. You win elections by playing the to real interests of the public, and that has been the effort of the Romney campaign this August.
A few words about the last time a Gold Commission was tried, back in 1981-82. First of all, all hail Howard Segermark, the intrepid Jesse Helms staffer (and political seer today) who put that commission together back in Ronald Reagan’s first years as president. In bipartisan spirit, Segermark had to include fierce anti-gold politicians, such as Rep. Henry Reuss of Wisconsin. Reuss is the one who predicted, as the U.S. delinked from gold at $35 an ounce in 1971, that the price would dive to $6. In no time it went to $200, then $800 an ounce.
BY BRIAN DOMITROVIC: