The Gold Standard, Part 2

Joseph Dewey
This entry is part 15 of 50 in the series 2011A

2011A

Those who want to return to the 100% gold standard often point back to those halcyon days before 1913 when the money of the United States was based on gold.

This thinking needs some adjustment. Up until 1873 the nation was on a bimetallic system.  That is both gold and silver were used as a basis or backing for our money. Technically this was not a gold standard period, but was a gold/silver combination standard. If we were to hone it down to one metal we would have to say the standard relied more heavily on silver than gold because the value of gold was established by the value of the Spanish silver dollar.

In 1873-4 silver was demonetized in an attempt to create a gold standard. This was done through two pieces of lengthy legislation passed under the radar with few people outside of Congress approving of it or knowing what was in the bill.  It was a little like the Healthcare Bill of 2010 where we were told that they had to pass it to find out what was in it. Even President Grant didn’t know that silver had been demonetized for some time after it was passed.

However the people soon woke up and smelled the coffee and discovered that they could no longer use silver to pay bills. This sent the nation into shock as a large portion of the nation’s money was suddenly not money any more.

Meanwhile those behind the legislation who knew what was coming converted their assets into gold and made out like bandits while many common people lost everything.

Many were not happy with a gold only standard and pushed Congress to act.  On Feb 16, 1878 Congress passed the Bland Bill re-monetizing silver.  The fact that it passed 205 to 72 gives strong evidence that people were not that happy with a gold only standard. Also the fact that a depression occurred a few months after the gold standard was implemented just added fuel to public dissatisfaction.

The nation thus went back to the gold/silver standard until the passage of the Gold Standard Act of 1900. From 1900 to 1918 we were on the single monetary gold standard. Because of the war we threw the gold standard out the window (from 1918-1919) and the value of the dollar rested only on faith and the value of goods and services produced. This occurred with the other warring nations, but for longer periods. After the war we then went back on the gold standard until 1933 when it was dramatically changed by FDR who made the consumer use of gold illegal.  Gold could be exchanged between nations, but not individuals and the dollar could no longer be redeemed for gold.

So we had the closest thing to a pure gold standard from 1873-1878, 1900-1918 and 1919-1933.  Before that, for most of our history, we had a bimetallic standard, which used the competing metals of gold and silver.

But… have we ever had a pure full-reserve banking system backed by either gold or silver?  Actually, we haven’t.  There has always been some type of fiat money in circulation since the beginning of the Republic so one could say that a full-reserve gold-backed system really only exists in theory and has never been tested – that is unless you want to go back to the 16th century and earlier to the Dark Ages.

The closest thing to a pure metallic standard in our history has been a partial gold standard consisting of fractional banking that allows for a mix of fiat money with gold and silver.  During this period citizens have been promised that they could redeem their money for gold, but that money has always been at risk due to runs on banks caused by unforeseen circumstances and the frailties of human nature.

Still many full reserve gold standard advocates point to our history of the good ole days when citizens could redeem dollars for gold as the financial Camelot of our history.

One of the main arguments for its restitution is to cite the progress we made with inventions and overall improvement of the standard of living while it existed.

As of this writing it has been 78 years since we have gone off the redeemable gold standard in 1933.  If we subtract 78 from 1933 we arrive at the year 1855.  If we look at the two periods 1855-1933 which used a metallic standard compared to 1933 to the present we see that great progress has been made in both times.  Does the progress since 1933 create an argument to the case that we should not have a redeemable gold standard? If one says no then he can’t use a corresponding argument that the gold standard was a prime reason for progress before 1933, or 1913 or whatever date is selected.

If the gold or gold/silver standard of the past worked so much better than fiat money then the economic times should have been a lot better while it existed.  So, were there any downturns while we had metallic based money?

Quite a few actually.  There was either a depression, financial crises or severe recession that started in the following years – 1792, 1796, 1819, 1825, 1737, 1807, 1847, 1857, 1873, 1884, 1890, 1893, 1901, 1907, 1910, 1920 and of course the Great Depression beginning in 1929.

Some of these were as bad as the great Depression except they didn’t last as long.  Several were particularly severe. The depression of 1837-1843 was devastating as was the one from 1873-1879 with even longer effects in Europe.  There they called it the Great Depression.  The depression of 1893-1897 is sometimes called the worst economic downturn except for the Great Depression.  Unemployment hit over 18%.

A little known or understood depression began in 1920.  Wholesale prices dropped a whopping 36.8%, and the retail value close to 50%, the largest in history. Unemployment began to soar and the GDP lost 24%.  This could have easily been worse than the Great Depression.  Consider that in the devastating year of 2009 the GDP only lost 2.4%.

Calvin Coolidge, an unsung hero, solved the problem by cutting spending in half and by 1923 cut taxes from 73% to 25% on the top rate. The stock market tripled and wages increased 20%. By 1926 the unemployment rate went down to from 11.9% to 1.8%.

After the Great Depression and going mostly off the Gold Standard we have had recessions in 1973, 1980, 1990 and 2008. Only the 2008 downturn compares in any degree to earlier depressions.

Looking at history then one cannot say that one of the advantages of the gold standard is that it keeps the economy stable.  There have been major calamities with and without the help of gold, but the greatest ones so far have occurred during the days when gold and silver was the foundation of our money system.

How do Gold Standard advocates explain this?  Here is a quote from “Gold: The Once and Future Money,” a popular book advocating a return to the Gold Standard.

“The gold standard cannot be blamed for crises caused by leaving the gold standard or for those that took place while the gold standard was not operating…Liquidity-shortage crises are not inherent to the gold standard, and the problem of the liquidity-shortage crisis was eventually solved within the gold standard framework.” 1

Another explanation I have heard is that the problem was that we just did not adhere closely enough to the gold standard.  If we had done this then no major problems would have occurred.

I find these explanations very flimsy on logic for problems occurred in times of closest adherence and not so close.  This argument reminds me of the one produced by the socialists and communists who always claim that problems occurred because the people did not follow the model closely enough. They rarely consider that something could be flawed in the system itself.

Likewise, are there flaws in the gold standard itself that are ignored by advocates?  One would think that all the depressions that occurred during its practice is evidence that the money system of the past is far from perfect, just as is the one in the present.

One strong evidence of this is what happens when a great crises occurs, especially war.  In such times the gold standard is almost immediately thrown out the window.

During the Revolutionary War the colonists had little gold and if they had stayed on the gold standard independence could not have been won.  They immediately dropped the gold standard and printed fiat money.  This was imperfect but worked better than gold which was in very limited supply.

During the Civil War both the North and the South abandoned the gold standard and printed their own money.

In World War I the United States and other major nations involved all abandoned the gold standard in favor of fiat money.

Deep into the crises of the Great Depression FDR abandoned gold redemption for all citizens.

During World War II many billions of fiat dollars not backed by gold were used to win the war.

During the Vietnam War Johnson removed all silver from our coinage and then in 1972 Nixon completely removed us from the gold standard between nations.

Obviously, there is a big problem with the gold standard when it comes to dealing with a threat to the survival of a nation.  Not only the United States but all nations throw it out the window if their survival is on the line.

Do we really want to go back to a monetary system that is so rigid that it is abandoned at the sight of any major crises?  Is there not a better system that can be created that we do not have to throw out the window every few decades?

There is an answer and solution to every problem and we will discover that solution as we proceed.

1. Gold, the Once and Future Money, Nathan Lewis; John Wiley & Sons, 2007, Page 174

2. Most of the other data cited is readily available at Wikipeadia and many other sources.

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11 thoughts on “The Gold Standard, Part 2”

  1. lwk wrote, “Even the most cursory examination of the history of the United States will show you that the size of the Federal government was very constrained when the monetary system was largely backed by some form of commodity, usually gold and/or silver.”

    Basically lwk says the metal standard is what kept the Federal government small. However, we see another huge change in government which paved the way for out of control Federal expansion: the 17th Amendment. I will show you how number 17 paved the way for Federal expansion rather than changing from the metal standard for money.

    Before number 17, Senators were chosen by and they served at the will of their respective state legislatures. That is why the Constitution utilizes the Senate for “Advise and consent”. The Senators original Constitutional purpose was to watchdog the Federal government to see they did nothing that would hurt the states. The Senators served at the will of the local state political power base from whence they came. They were watchdogs on a leash. This was imperfect. Some legislatures squabbled over who would get the appointment and this resulted in periods where some states would not even have Senators for several years. But the watchdog effect was still very strong in keeping the Federal government from usurping state perogatives.

    Amendment 17 changed all that. After 1913 Senators were all chosen by popular vote just like Congressional Representatives. So they were no longer beholden to the local state power base but, instead, looked to the tools of popularity through the press for election, exactly like the Congressional districts. So now, without the watchdog effect protecting local state power and other local state interests, the Federal government had no one stopping them from wholesale usurpation, which they commenced in earnest. With no one to curb Congressional power, our Federal government got out of balance like one hand clapping. You easily see the result in our bloated budget and in our bloated deficit and in so many programs usurping state powers that would never have been tolerated by the affected state legislators if they still had their direct representatives in the Senate. This change resulted in much extremely bad law over the years and accounts for the unstoppable Federal growth at the expense of state’s rights and powers.

    lwk states that metal backed money would have slowed Federal growth. It might have some effect in this direction. But I don’t think it would make nearly as much difference as keeping the original check and balance provided by the watchdog setup in our original Constitutional Senate. However, I believe our money has been sick because it has been subject to change the whim of our Federal government. And the worst thing they did to our money was to place its control into the hands of private bankers. This is obviously a case of the “foxes guarding the hen house”. In my opinion, the terrible prices we’ve paid because of the Federal Reserve controlling our money, combined with the centralization trend created by Amendment 17, and also combined with the major change in Jury law (I’ll explain that one next), has caused 90% of all our problems. These three things account for most of domestic problems we see throughout American history.

    Juries in America were based upon the Magna Carta. I’ll do my best to summarize this short but you can see a longer explanation of it at Keysters where I explained it in Technicolor a few years ago. Originally juries had power to judge the LAW and the FACTS. John Jay (an original framer of the Constitution and the first Chief Justice of the Supreme Court under the new Constitution) prescribed jury instructions which pointed out that juries owned the right and power under the Constitution to judge both the law and the facts. Then, beginning in a case which started in 1895, the Supreme Court ended up legislating from the bench and changed it so they claimed juries only had the right to judge the facts. After this worked its way through the courts, jury instructions began to reflect this new idea.

    This removed another major “check and balance” intended by the framers of the Constitution. This would nullify bad laws. It was called “jury nullification”. In effect this is what ended prohibition – juries would not convict bootleggers unless the case also involved murder or some other crimes. The people, at large, simply did not support prohibition. Finally the only logical step was to do away with prohibition.

    But the damage had already been done from the 1895 case. When the new generation grew up who had not been taught in the schools of their power of jury nullification (the prohibition juries had been taught the old ways in schools), jury cases began reflecting only the will of the judge. When the judge prescribes to the jury extremely narrow interpretations of law upon which he allows them to decide and when the judge also controls every piece of evidence the jury may see or hear, then the judge, in effect, dictates the outcome. The common sense of the common man no longer shines in our courts. We feel this pain in thousands ways as bad laws persist which no jury would have allowed.

    So these three problems (specifically removing powers from the people to check their government) which removed essential checks and balances put in place by the founders: Amendment 17, money moved to the control of private bankers, and the end of jury nullification; changed America for the worse in a million ways. It’s like Sampson had pulled down three keystone pillars from the Constitution and we’ve been plunging toward more and more Federal control of everything ever since. The built-in controls placed by our founders would have accrued to more freedom for the people and would have curbed usurpation by the Federal government but, sadly, the governor has been removed from the Federal engine. I am certain that specific schemers, who knew full well the effect of removing these protective checks and balances, headed up their demise. Basically through ignorance Americans let themselves get snookered by people who very cleverly hid the true impact of these changes.

    And these schemers followed up taking extreme care never to teach any of this in schools. In fact, you can go all the way through High School and even college and still not know these simple truths I just showed you, much less understand the other sublime principles of our Constitution. I went all the way through college and it was never taught to me. They don’t even attempt to teach it! They obviously prefer your ignorance. They find it so much easier to usurp more and to deceive you more when you remain ignorant. Have you considered befriending the Constitution? When you make a friend, you get to know them and you spend time with them and you share at least some of their motives. We must befriend the Constitution if we want to save our freedom. This demands a lot of reading and a lot of work and a lot of commitment. Freedom ain’t cheap.

    These three points may seem very intellectual and, like all higher principles, even a little difficult to hold in your mind at first. I found this Amendment 17 principle elusive in that its import kept slipping from my mind until I revisited it many times to cement it. For that reason, I believe this is a principle of the higher mind. Therefore it does not surprise me that so many voters got deceived about it failing to sense its gravity. Also I think this argues for not making this the very first principle to address in reclaiming our freedoms. Instead we must first build a power base and get some big wins under our belt and work toward better education through our grass roots mechanisms which we build for restoring our freedoms and respect from our government. But when you think it through carefully, you readily see the devastating effect accumulated against freedom and against the power of the common man and woman caused by Amendment 17. In some ways it almost seems counterintuitive to protect the local political power base. But it provides a sterling check and balance. Our founders knew this when they originally used it.

    I think JJ’s book will go a long ways toward correcting these problems. For example, his last chapter teaches truth about the money problem; though we have not yet seen his proposed solution. I don’t think he addresses Amendment 17 nor jury nullification. But the steps he does take set up, I think, an atmosphere of political power to the people that will later make such changes possible. We’ll see.

    However, now that I’ve seen Patri Friedman’s comprehensive treatment of seasteading, I begin to see that as a viable alternative to fixing America. So I plan to help do the fixing if we can. But if we cannot then I plan to be a charter seasteader.

    Your brother,
    Larry Woods

    Reply

  2. You wrote:

    “If the gold or gold/silver standard of the past worked so much better than fiat money then the economic times should have been a lot better while it existed. So, were there any downturns while we had metallic based money?”

    This is good question. One question you didn’t actually ask, but seemed to have assumed the answer to, is what does it really mean for something to work well? Even the most cursory examination of the history of the United States will show you that the size of the Federal government was very constrained when the monetary system was largely backed by some form of commodity, usually gold and/or silver.

    The huge size and intrusiveness of the present Federal government is only possible due to almost unlimited borrowing power of the government and that borrowing power is only possible due to the fiat money system we currently operate under. So if your goal is to keep government size and power in check then using a monetary system requiring a sizeable portion of the money to be backed by real commodities with real value has worked pretty well.

    But what you actually mean is that you do not observe that somehow magically a gold and/or silver standard prevented economic cycles of expansion and recession. That is of course true. It is true because there were other factors involved, primarily government interference in the economy. The basic fault of your analysis is that it is far too simplistic and ignores what is the principle cause of the problem which is people in government attempting to influence economic outcomes for various reasons (most often for their personal enrichment) which most often lead to disastrous results.

    Gold and silver are not a magic cure when those in government have enormous power to influence the economy, often out of sight of the the common people (part of the principle of how the Beast works – right?)

    There is probably no economic system, or monetary system, that can completely protect against upturns and downturns of the economy. That has always been the great fallacy that has led to many of our problems. Economies are driven by people’s expectations and sometimes people make serious mistakes. For example people may become too optimistic and over invest in some area of the economy. Eventually reality asserts itself and there is a mild recession to correct the problem. Life goes on.

    However those in government would blame these relatively mild downturns on “greedy investors” or “greedy bankers” or whatever and would tell people that if they just let them (government) adjust things a little then permanent prosperity without any downturns was just around the corner. Their “adjustments” almost always proved to be worse than the cause and down the road led to even worse downturns. That is largely the history of the 19th century in the United States.

    (Exactly the same mechanism played out recently in the real estate bubble – government caused the problem by forcing unwise lending decisions then blamed the problem on “greedy Wall Street bankers” and not their own irrational decisions.)

    In summary you need to seriously ask the question as to what it means for a monetary system to “work well” and what the evidence is that it is indeed working well. It is not necessarily the case that having a completely predictable economy with a continual upwards slope of increased prosperity is the answer. Some degree of variability is absolutely healthy. Mild recessions driven by a need for an economic “course correction” are a good thing too (remember the analogy you used some time ago about how driving a car involved numerous small corrections to stay on course). Government interference in the economy almost always prevents rational course corrections until the problem becomes so severe that the remedy must be drastic indeed. We are presently seeing that taking place in front of our own eyes.

    Also, and this is one of the more important factors, placing complete control of monetary policy in a centralized government and giving that government the unfettered power to create fiat money – even if it could prevent recessions and depressions (which it can’t) – would be a disaster for personal freedom because it would enable the monstrously intrusive government we presently see.

    What is needed is a free market in money just as we need a free market in goods and services. The solution is not for you to come up with some suggestion of what kind of money a government should issue. You need to ask how a free market in money could be created where the value of money was not under the control of a few government bureaucrats, but rather under the democratic control of every person in society in effect “voting” by their unforced economic decisions (their purchases and investments).

    lwk

    Reply

    1. Just to clarify some more what I said above. You wrote that:

      ” Money is a medium of exchange which is established by law”

      “Medium of exchange” is one of the core properties of money (“store of value” is another, but not touched upon so far in this discussion). “Established by law” is not necessarily a property of “money.” Perhaps we are blinded to this by the fact that governments (that is “Beastly Authority”) has almost always sought to “corner the market” on money and strictly control what is considered “money.”

      Governments have always sought to control money. That is true. It is not true however that such control is a necessary part of the definition of what money has to be. In the early history of the United States the creation of what passed as money was not an exclusive monopoly of government. That experiment had flaws, but those flaws were not allowed to be worked out but rather were used as excuse to allow government to create an absolute monopoly to itself in the creation of money.

      I think the future solution to the problem will be “looking in the opposite direction from the majority” and rediscovering the important principle of freedom in the creation of money. In most instances when government assumes more authority it is increasing the power of the Beast. “Question Authority” is an essential principle here.

      lwk

      Reply

    2. Good points Larry and I plan on touching on them when I talk about some of the advantages of the Gold Standard…BUT the power to tax and regulate gives government more power to expand than deficit spending. If we were on the gold standard today they would just concentrate on taxing us more rather than borrowing more -= except from other nations.. Even though the gold standard does help a little to reign in big government we had our largest expansion of government in 1913 with the income tax and other laws passed and paved the way for unlimited borrowing with the creation of the Federal Reserve. I think any revision of our money system needs to include a means to limit or control spending and borrowing.

      Reply

      1. You wrote:

        ” If we were on the gold standard today they would just concentrate on taxing us more rather than borrowing more.”

        I think it would be impossible to raise taxes high enough to support the level of spending we see today. The only way to do what they are doing today is to borrow and print money.

        And:

        “… our largest expansion of government in 1913 with the income tax and other laws passed and paved the way for unlimited borrowing with the creation of the Federal Reserve.”

        I would agree with your statement above. I don’t have a problem with an income tax per se, but there needs to be some Constitutional limits on the power of government to tax and the tax system has to be spread out more fairly where everyone pays some income tax, unlike today when a significant number of people pay nothing.

        I personally think that if we have to have government issued currency then it would be good for it to be backed by something tangible. However I would like to see the possibility of having something other than a government issued currency.

        lwk

        Reply

        1. Thanks for your comments. It’ll be interesting to see your thoughts on the rest of this chapter. Actually it will probably be more like a section than a chapter.

          Reply

      1. You wrote (problem in uppercase):

        “The closest thing to a pure metallic standard in our history HAS BEEN HAS BEEN a partial gold standard consisting of fractional banking that allows for a mix of fiat money with gold and silver.”

        You wrote “has been” twice. That is the typo.

        lwk

        Reply

  4. I heard all these pat answers from gold standard advocates before. But I never heard anyone look over the historical context in this way before. You make a sound case that the gold standard did not look so pretty as gold standard advocates always claim. I remain intrigued to see what solution you end up proposing.

    Your brother,
    Larry Woods

    Reply

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