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Why Keynesians Hate the Gold Standard

Economics / Economic Theory Aug 09, 2012 - 05:44 AM GMT

By: Gary_North


Diamond Rated - Best Financial Markets Analysis ArticleRecently, the leftist London Guardian posted an article against the nineteenth-century gold coin standard. The author, who seems recently to have begun shaving, has provided a highly useful summary of the Keynesian case against the gold coin standard. His article is a fine mixture of familiar old canards and creative new errors. His name is Duncan Weldon.

Mr. Weldon has not written a book, so it is difficult for me to know exactly what his monetary theory is. He was the unknown Keynesian in the 2011 BBC debate between two teams of economists at the London School of Economics: The Keynes vs. Hayek debate. I assume that Robert Skidelsky, his partner, thought he was an up-and-coming economist. Skidelsky is the author of a multi-volume biography of Keynes.

I think it would be a useful exercise to go through Mr. Weldon's case against gold. Clearly, he expects people to take it seriously. While I cannot bring myself to do this, having actually read it, I do think some editor at The Guardian took it seriously, even though he also read it.


He begins with an historical statement.

Ever since Richard Nixon ended the convertibility of the US dollar into gold in 1971, there have been calls for a return to some form of gold standard. Proponents of this view, often known as "gold bugs", want to see an end to paper money guaranteed by promises and for currencies to once more be backed by precious metal. In the last few years as central banks around the world have engaged in quantitative easing to try and support their economies these voices have become louder.

This is surely comforting to any gold bug who is old enough to remember Nixon's announcement, made when Mr. Weldon's parents were teenagers. At the time, the number of gold bugs was limited to a handful of Austrian School economists and a few elderly souls who could actually remember the pre-1933 American gold coin standard.

Over the next decade, the "hard money" newsletter industry blossomed in the United States, but the number of gold bugs who had access to the mainstream media was still not much larger than a few dozen people. I may be exaggerating these numbers. I cannot think of any gold bug in a professorial position in Great Britain.


Having misled the readers regarding the size and influence of the gold standard's acolytes, he gets rolling.

The specific appeal of gold can be hard to rationalise: it might be aesthetically pleasing, but does that make it a sound basis for a monetary system?

I see. Aesthetically pleasing. It's a matter of taste. Nothing substantive, you understand.

Note: as a debater for over 50 years, I recognize this tactic. When a debater indulges in the rhetoric of contempt in his opening arguments, we can be sure of three things: (1) he thinks he has the judges on his side; (2) he has not got a strong substantive case; (3) he thinks his opponent has only recently fallen off the proverbial turnip truck.

Sometimes I wonder if gold bugs just listened to too much Spandau Ballet in the 1980s.

I cannot say that I am familiar with the Spandau Ballet. Wikipedia informs us that it was a popular rock band in Great Britain. What it has to do with gold eludes me. The phrase "too clever by half" comes to mind.

Robert Skidelsky argued that supporters of the gold standard have an almost atavistic belief in its powers, rooted in the age-old worship of sun gods.

I am quite familiar with Skidelsky's work. He is an economist-turned hagiographer. Of his eleven books listed in his Wikipedia entry, five are on Keynes. None is on any aspect of economic theory, including monetary theory.

So far, in his first two paragraphs, Mr. Weldon has used three examples of rhetorical contempt, but no substance.

This strategy plays well in the debate societies at Oxford and Cambridge, but it does not play well across the English Channel, let alone across the Atlantic. Mr. Weldon is clearly uninterested in any audience beyond Oxbridge and the Labor Party.


Here, he identifies the enemy position of all Keynesians.

What they tend to ignore is that the world has tried the gold standard before and it was, in most respects, a disaster.

Here is a statement. It is a conclusion. It is not an argument.

The world tried the international gold standard from 1815 until the outbreak of World War I 1914, which was the greatest period of economic growth in recorded history. The world of 1900 would have been unrecognizable in its wealth for the masses by someone getting out of a time machine activated in 1800.

At present, as the economy grows and produces more goods the central bank can expand the money supply to keep up with output. Under the gold standard, as output increases, the money supply will be fixed and with more goods but the same amount of money, prices will tend to fall.

So, prices tend to fall under the gold standard. The horror! Why, the whole consumer price index would begin to resemble the cost of computing: ever less expensive.

We must understand Mr. Weldon's argument in the light of economic theory and economic history since 1800. Economic theory teaches that economic growth reduces the effects of scarcity. A world without scarcity would be a world where demand and supply balance at zero price. Therefore, when there is economic growth, we should expect to see a world in which consumer prices are falling in the direction of zero prices. The gold standard fostered a world which conforms to the traditional call of economists, who preach the doctrine of salvation by economic growth.

Mr Weldon is appalled by such a conclusion. Why? Because it points to a very great advantage of the traditional gold standard: reduced consumer prices. So, he invokes falling prices as evidence of the gold coin standard's disaster. He therefore implicitly invokes the good old days: greater scarcity, greater poverty, and the all-round economic misery, a la 1800.

I am not using the rhetoric of contempt . . . yet. This really is the logic of his position.

He continues.

Falling prices might sound like a good thing, and in individual cases they often are, but a falling general price level is usually associated with severe economic strains. Why buy anything today if it will be cheaper next week? The end result tends to be falling output, rising unemployment, falling wages and a large increase in the real burden of debt.

When he says "usually," he means usually since the end of World War I, in which the gold coin standard was abandoned in the West, except in the United States and the United Kingdom, 1925 to 1931, when Winston Churchill unwisely re-established the gold standard at the pre-War price, ignoring a decade of mass inflation. He did this for political reasons. The fake exchange rate maintained the convenient illusion: the fact that the men – he and his colleagues – who had taken the nation into that disastrous war and then had destroyed the pre-War pound sterling as an effect of their financing of the War through currency expansion had not in fact ruined the pound.

Most economists now accept that both the Long Depression of 1873 to 1896 and the Great Depression of the 1930s were aggravated by the gold standard. In the 1930s the sooner countries came off gold, the faster they recovered.

The period of 1873 to 1896 was the single most productive economic period of comparable length in mankind's history. In the section of Friedman and Schwartz's book, A Monetary History of the United States (1963), which the Keynesian economics guild never cites, they proved this with respect to the economic statistics of the United States.

As for economic recovery after 1930, the main nation to recover was Nazi Germany, which used monetary inflation, price and wage controls, rationing, and violence against trade unions as the primary policy tools of economic growth. The Nazi state held down nominal prices by the threat of violence, thereby cutting real wages, so the statistics looked like recovery. The story of this "recovery" is found in Adam Tooze's book, The Wages of Destruction.


Here, he raises the issue of democracy.

A gold standard means that monetary policy and interest rates are set to defend the value of a currency against a metal rather than to reflect economic conditions in the country. As professor Dani Rodrik argued last night, this is fundamentally undemocratic.

Here, we get to the political heart of the debate. The traditional gold coin standard transfers power over monetary policy to the broad mass of citizens, who can start a run on the banks at any time if they suspect that the central bank – highly undemocratic – is turning to inflation as a way to fund the government's debt. It is the democracy of the free market, and the democrats of the ballot box despise this aspect of the free market. They want monetary policy controlled by an alliance of central bankers, commercial bankers, and politicians, who all want to run larger national government deficits without raising interest rates.

The opponents of the gold standard are always defenders of the autonomy of central banks from politics. This argument is correct. These banks are indeed autonomous, or close to it. The central bank is the most undemocratic official government institution in every nation. Calling for the insulation of the central bank from politics is politically comparable to calling for the secret police to be independent from politics, except that the secret police only threaten a few thousand people. The central bank's policies threaten the nation.

Indeed the real reason that the gold standard could not be resurrected in a sustainable manner after its suspension [in] the first world war was the extension of the franchise to incorporate the working class. Once workers had the vote they were unlikely to support politicians who continually put defending the value of money against gold over defending the number of people in work.

The working class, through its ownership of gold coins, and its ability to cause a run on the banks by withdrawing their money in small gold coins, was in fact disenfranchised economically after World War I began. They refused to return to the pre-War gold coin standard in 1918. Politicians and bankers did not want to transfer this power back to the masses. Once the central banks in every nation stole the gold from commercial banks, who had stolen the gold coins of the depositors by breaking the contracts of full gold coin redemption on demand, the political elite never again let the masses have their coins.


The central bankers have long hired bright young economics graduates of Cambridge and Oxford to persuade the middle classes that fiat money creation by a politically independent central bank was just what the nation needed. The central bankers did the same in every Western nation.

Of course the gold standard had its beneficiaries, most notably in the financial sector. Stable international prices and a very open global capital market in the era of the classical gold standard created a great environment for international bankers.

Here, he reverses historical causation. It was the banking establishment that opposed the re-establishment of a gold coin standard. Why? Because it reduces the ability of the financial community to make massive profits through fractional reserves. Fractional reserves provide the leverage that makes large commercial bankers rich. This is why there is no such thing as a commercial bank that has publicly promoted the gold standard. The last major economist to be employed by a large commercial bank to write in favor of the gold standard was Benjamin Anderson. Chase let him write its newsletter. He left Chase and returned to teaching before the outbreak of World War II.

Economically, the case for the gold standard simply does not stack up and yet it still finds very vocal supporters. Fundamentally the case is political rather than financial. Gold bugs want to see golden handcuffs restraining the ability of central banks to intervene and states to spend, they want to remove any vestige of political control of the monetary system and fix it an arbitrarily chosen shiny metal in order to let free market forces take over. It is therefore no surprise that most gold bugs are to be found on the libertarian right.

Here, he finally gets to the truth. The issue is indeed deeply political. Gold bugs do indeed want to see golden handcuffs that restrain the ability of central banks to inflate. They want to substitute economic control by the masses who own gold coins for political control by an elite. So, gold bugs are usually found on the libertarian Right.


Mr. Weldon is part of a long and distinguished tradition of economists who spend their lives at the feet of central bankers, doing their ideological work for the bankers in exchange for a few scraps that fall from the table.

If you detect the rhetoric of contempt creeping in, you are pretty observant.

These men have baptized the state and the power of monetary debasement as the way of wealth.

Every political class needs its court prophets. Every banking establishment needs politicians who do their bidding. Young men who are not good in physics or chemistry or engineering see their career opportunities at Oxford and Cambridge. They major in economics. The smart ones become bankers. The less smart ones become economists.

The ones who are not smart enough to major in economics major in politics and become politicians.

The bankers hire the economists to tell the politicians what to think.

The economics graduates who are not good enough to get hired by the big banks go into financial journalism.

Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

© 2012 Copyright Gary North / - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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