David Stockman's Delusions: The Gold Standard Is Still a Really, Really Terrible Idea

Barbarous relics are relics for a reason


Have we been living in some kind of economic hellscape the past 80 years?

Now, the past five years have been brutal. And the five before that weren't great, either. But it seems hard to argue that the U.S. economy peaked in any way back in 1933. Well, unless you're a certain kind of libertarian. The kind of libertarian who thinks we cast ourselves out of our economic Eden after we cast off the gold standard to taste the forbidden fruit of fiat money.

In other words, a libertarian like ex-Reagan budget director David Stockman.

In a long and rambling piece that really defines the word "screed", Stockman inveighs against the Federal Reserve and deficit-spending for allegedly creating fake wealth and real bankruptcy. Rather than propping up our still-weak economy with monetary and fiscal stimulus, Stockman pines for what he imagines was, well, our golden age: the age of the gold standard and balanced budgets. It sounds plausible-ish -- who's for more bubbles and more debt? -- but it actually fails every test of logic and history.

The gold standard didn't save us from dystopia. The gold standard was dystopia.

The gold-standard era was a time of more frequent recessions, more protracted recessions, and more severe recessions. In other words, the bad old days. Now, there isn't great annual data from before 1929 -- that's when the concept of "GDP" was invented -- but Measuring Worth does have reconstructed real GDP per capita figures going back to 1869. I averaged out its growth over five years to smooth out some of the volatility, and, as you can see below, added recession bars in GREY.

The "golden" years were actually the greyest years, the worst years. The economy was in recession 52 percent of the time between 1874 and 1933. We've been in recession just 16 percent of the time thereafter.

But it wasn't just recessions that were far more common under the gold standard. Depressions were too. Think about how bleak the past-half decade has been. It's been so bad that the five-year average of real GDP per capita growth has actually turned negative. That hasn't happened since the years right after World War II. Now look at how many times five-year growth turned negative under the gold standard. It happened four times (counting the period from 1907 to 1914 just once).

In other words, our ancestors had our once-in-a-generation disaster once a decade.

At this point, you might be wondering why anybody wants to bring back the gold standard. How could a shiny rock be worth all this economic misery? Well, some people really like gold, and really like recessions. As Paul Krugman pointed out in a classic essay for Slate, there's something of a Midas fallacy at work here. Goldbugs, many of whom wear bow ties, mistake the ability to buy gold, rather than goods and services, as the benchmark for the dollar. If they can't buy as much gold as they would like (and they never can), then they want to fix the value of gold in dollars. That's why they want gold, rather than oil or silver or ketchup bottles, as the reference point for the dollar.

But the bigger point is having some fixed reference point for the dollar. That prevents the Fed from printing money, and the government from running deficits for very long. In other words, it stops the government from intervening in the economy. But "intervening in the economy" is just another way of saying "fighting recessions". If the government can't fight recessions, then you'll get more of them -- and more of them will turn into depressions. And that's exactly what we see in the historical record. Of course, libertarians like this. As Joseph Schumpeter said, the "work of depressions" is purging the rottenness of malinvesment. Even if, as is so often the case, that means dragging everybody else down in a vicious circle.

This libertarian worldview is fundamentally a religious one. The Market metes out its punishment for our speculative sins with the quite-visible hand of recessions. And we must accept its judgment. Doing anything to avoid our penance is just blasphemy against the one, true faith.

It's a barbarous relic.