Posted by
Andrews on Wednesday, February 25, 2009 4:02:18 PM
As regular readers know, I often argue for the gold standard. Whenever I bring it up, however, someone will inevitably try to suggest that the gold standard is "antiquated", or is somehow to blame for the "boom-bust cycle", or will argue that the government must "manage" our money supply to ensure growth. I would like to respond to those criticism with a single question.
If the gold standard was so inappropriate, and managed currency was so beneficial, why was the foundation of the Federal Reserve immediately followed by the overheated growth of the twenties and the subsequent world-wide collapse of the depression? If managed currency can cure the "boom bust cycle", and gold causes it, why did it persist and produce the worst depression in US history? And why, if gold is such an impediment to growth, did the closing of the "gold window", cutting our final ties to a gold standard, lead to the Carter stagflation, the recession of 1981-2, the inflation of the 1990's and 2000's, and our current collapse?
I would hardly argue that gold is perfect, or gold is a solution in itself. During the gold period of the late 1800's, government intervention in banking allowed inflation to exist and started the myth that the "free market" was inherently prone to the "boom-bust cycle", which was actually the result of the three-tiered banking structure mandated by the government, as well as the substitution of government securities for gold as bank reserves (also government mandated).
Still, if managed currency is such a panacea, then why did some of our worst recessions and depressions, not to mention almost constant inflation, follow our transition from gold to paper?
POSTSCRIPT
I covered similar matters, with a bit more detail in "
The Inflation Engine".