Evidence for the Gold Standard

Release Date
July 19, 2017

Topic

Economics The Fed & Monetary Policy
Description

Is there evidence the gold standard is good for America? Here’s what Prof. Domitrovic told Federal Reserve Chair Janet Yellen. For more on the gold standard, watch

    1. What is the Gold Standard? – Learn Liberty (video): Still not sure what the gold standard is? Professor Lawrence White explains what it is and why it was abolished and argues why we should bring it back. 
    2. Econ Duel: Fiat Money vs. the Gold Standard (video): Economists Scott Sumner and Larry White debate the positives and drawbacks to the gold standard vs. fiat money, and the role of central banks. 
    3. Business Cycles Explained: Austrian Theory (video): Professor Tyler Cowen explains why they Austrian economists believe there should be a gold standard, or at least tight monetary rules. 

Brian Domitrovic: The gold standard, the way the United States always used to organize it’s monetary system. In fact, if you look back in history virtually all the great eras of economic growth were associated with a time when the United States was really dedicated to a gold standard, and all the periods of disruption and unemployment and all that are when the gold standard was abrogated or not taken seriously.
Now you might ask, “What about the last, I don’t know, 45 years?” The United States did, after all, officially go off the gold standard, I guess once and for all, in August 1971. What about the time since 1971? The ’70s, ’80s, ’90s, and 2000s, when we haven’t officially been on the gold standard? Two years ago, the very Chairman of the Federal Reserve herself, Janet Yellen, asked me that question and invited me into her office to explain the last 45 years when we haven’t had a gold standard, and I want to tell you a little bit about what I told her that day in February 2015.
What is said to her is if you look at the four decades since went off gold, the 1970s, ’80s, ’90s, and the 2000s, that period, there are two classifications. The 1970s and the 2000s were both gross economic periods. You had stagflation in the 1970s when prices increased 10% per year, recessions came every 3 years and they were double dip, unemployment went up to eight, nine, 14%. Stagflation: Economic stagnation along with price inflation, and in the 2000s, I hope I don’t need to tell you, were kind of a terrible economic era. We had the Great Recession, very slow growth throughout the entire now 17 year period, unemployment reaching new highs, underemployment, labor force participation all at bad levels.
So, when you look at the 1970s and the 2000s you have bad economic performance, but then in between there you have these other two decades. You have the 1980s and the 1990s. Stock market up 15 fold, 40 million new jobs, all sorts of explorations of new prosperity, technological revolution. Incredible stuff. What’s the control? How much attention we paid to the de facto gold standard.
What do I mean by, “The de facto gold standard”? All the gold standard is is a guarantee by the issuer of the US currency that the US currency, the dollar, will not vary in it’s price against gold, that it will always have the same price. Private market sells gold for $350 an ounce, it will stay that way. That’s essentially a gold standard.
Well in the 1970s the United States paid no attention to the private price of gold. It went from $35 an ounce to $840 an ounce and zigzagged all between. That’s tremendous variation. What was the correlation in economic performance? Horrible. Same thing in the 2000s. Gold went from $300 an ounce to $1800 an ounce, down to $1200 an ounce. Horrible economic performance all around. In the 1980s and 1990s, what happened? Gold was stable at $350 an ounce the whole time.
So when the United States decided, “We are going to target the price of gold in our monetary policy,” which is the main aspect of a gold standard, phenomenal results occurred. Massive increases in the stock market, increases in the levels of employment that were so huge they were unprecedented. Just phenomenal economic prosperity happened when the United States pursued a de facto gold standard in the 1980s and 1990s. When the United States ignored the mandates of gold in the 1970s and the 2000s, we saw the grossest economic periods since the 1930s.
So that’s what I told Chair Yellen. I said, “You know, if you want to enact a good monetary policy, we know even what recent history tells us. Recent history tells us that the best way to conduct monetary policy is to pay attention to the price of gold and to keep the dollar good and stable against gold.”