June 5th was is the anniversary of the birth of John Maynard Keynes, once upon a time the great foe of the gold standard. Today also, coincidentally, happens to be the anniversary of the date celebrated of FDR’s “taking America off the gold standard.”
These events are not mere historical curios. The current presidential campaign, and underlying political climate, shows we are finally, maybe definitively, emerging from the academic economists’ anathema on the gold standard. Considering how badly the economy is doing — and has been doing for 16 years — this is a very good thing.
Donald Trump, the presumptive GOP presidential nominee, is on record as strongly appreciating the gold standard. His closest runner-up, Sen. Ted Cruz, campaigned on the gold standard. Something has changed. Maybe something big.
Thus we depart from “Neo-Keynesianism.” As Keynes wrote in his General Theory of Unemployment, Interest, and Money (chapter 24, part V):
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
Keynes was a supremely practical man. One infers he is spinning in his grave over his absurd status as the prevailing defunct economist enslaving practical men and as the academic scribbler from who our latest madmen in authority are distilling their frenzy.
In his 1923 Tract on Monetary Reform, Keynes famously called the gold standard a “barbarous relic.” What is less generally appreciated is that he was referring to the “interwar gold standard,” not the real deal classical gold standard. The “interwar gold standard” now is universally understood to have been a mere façade. It preserved the name of the gold standard but violated its fundamental “rules of the game.” Think baseball without balls and strikes.
The “interwar gold standard” in fact was a barbarous relic. It very likely was the main cause of the Great Depression.
The classical gold standard had closed shop in August 1914 and was innocent of causing the Depression. FDR in no way took America off the gold standard. Unschooled in economics, he may well have believed that he did. But that doesn’t make it so. As a 2011 Congressional Research Service report noted, “Under the system adopted by the Gold Reserve Act of 1934, the United States continued to define the dollar in terms of gold.”
To put it in context consider Liaquat Ahamed’s Pulitzer Prize winning Lords of Finance. Therein he recounts FDR’s “first hundred days”:
The string of measures was a strange mixture of well-meaning steps at social reform, half-baked schemes for quasi-socialist industrial planning, regulation to protect consumers, welfare programs to help the hardest hit, government support for the cartelization of industry, higher wages for some, lower wages for others, on the one hand government pump priming, on the other public economy. Few elements were well thought out, some were contradictory, large parts were ineffectual. While much of the legislation was very laudable, aimed as it was at improving social justice and bringing a modicum of economic security to people who had none, it had little to do with boosting the economy. Tucked away, however, in this whole motley baggage, as a last-minute amendment to the Agricultural Adjustment Act, was one step that succeeded beyond anyone’s wildest expectations in getting the economy moving again. This was the temporary abandonment of the gold standard and the devaluation of the dollar.
The “interwar gold standard” had permitted commodity prices to rise by about 50% while keeping the dollar pinned to the mat at $20.67/oz. Of course this caused the economy to seize up into the Great Depression.
FDR ignored the conventional wisdom of his Washington and Wall Street experts. He followed the advice of agricultural economist George Warren, the greatest expert in commodities prices of his day, who called for rebooting the system by revaluing the dollar to $35/oz as the slow erosion caused by the “interwar gold standard” required.
FDR set the gold standard back to rights, if temporarily. The economy soared.
Alas, FDR did not have a firm grasp on what he was doing. His Treasury began sterilizing gold inflows, causing the dip back into the Great Depression of 1937-38, as persuasively argued, in 2012, by Douglas Irwin in Financial History Review. FDR doing what Keynes called “the gold standard on the booze” is far different from ending the gold standard.
The mass confusion ended up giving the gold standard pariah status. Now it is re-emerging from the misconceptions and myths that have enshrouded it for four score years.
Michelle Jamrisko, a reporter for Bloomberg News, was among the first to notice this. Last month she reported Make America Gold Again: Calls for Everyone’s Favorite Standard Are Back Again. Jamrisko astutely reported that Donald Trump, the presumptive Republican presidential nominee, and Ted Cruz, the runner up, expressed sympathy for, or actually campaigned on, the gold standard:
Ted Cruz, in one of the early candidate debates last year, said the Fed “should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.”[…]
Then there was Donald Trump. “We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because “we don’t have the gold. Other places have the gold.”
One also well might take note of Trump’s comment to GQ:
Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.
Jamrisko quotes Jesse Hurwitz, an economist for Barclays Capital in New York, himself no supporter of the gold standard, as stating “The fringe has become the mainstream.…” It is, he says, “something we’ll increasingly talk about.” Hurwitz is right about this.
Rumbling discontent with the economy has left the establishment under siege, and you can’t get more establishment than the Fed. So, in a curious twist, it’s becoming easier for supporters of hard money — historically a policy favored by the rich — to give the idea a populist slant.
First a quibble over one obscure but relevant fact that Jamrisko can be forgiven for having not gotten quite right. The gold standard is not primarily “historically a policy favored by the rich.” President Grover Cleveland (a progressive Democrat) was an unwavering supporter of gold. He understood that the gold standard, properly done, was essential to economic justice.
So too did President McKinley (a Republican) who observed to a delegation of Pennsylvania coal miners “We do not want cheap money, any more than we want cheap labor in the United States.” The gold standard, properly done, benefits labor and enjoys labor’s support at least as much as that of “the rich.”
Jamrisko gets it exactly right when observing that “Below the presidential level … the gold camp and its allies have gained support.” Institutionally, the most important figure is Rep. Bill Huizenga (R-MI), chairman of the House Financial Services Committee subcommittee on monetary policy and trade.As Jamrisko notes:
Bill Huizenga, a Michigan Republican and chairman of the House Financial Services subcommittee on monetary policy … sees talk of a new gold standard as ‘more of an academic exercise than a real-world exercise,’ but supports rules that would restrain the ‘games being played’ by central banks worldwide.
Chairman Huizenga is to be commended for the respectful stance he takes toward the gold standard, both here and elsewhere. That said, when his party’s presidential nominee calls the gold standard “wonderful” it ipso facto has moved beyond the status of an academic exercise.
Will the gold standard come into play in the 2016 general election? It could.
Donald Trump clearly enjoys an intuitive appreciation of the gold standard. He has been misinformed as to whether we have enough gold to restore it.
We do. America, Germany and the IMF together have about as much in gold reserves as the rest of the world combined. America has well more than that of Germany and the IMF combined.
Trump’s prospects for winning the presidency would benefit from elevating the gold standard as a campaign issue. According to a 2011 Rasmussen poll 44% of the 1000 likely voters polled favored the gold standard. Only 28% opposed.
The gold standard unites the GOP. This is a stated Trump goal. (Corey Lewandowski, call your office!) It enjoys strong support from mainstream Republicans, conservatives, and tea partiers.
Bonus: the gold standard splits the left. Rasmussen discovered that gold enjoyed outright majority support of African Americans and members of labor unions. The ethnic and labor left, unlike the nomenklatura left, favors gold. These are two major Democratic constituencies crucial to Trump’s electoral strategy.
Hillary Clinton, the presumptive Democratic nominee, while First Lady, made a speech at The Sorbonne, reportedly stating that:
We have lived with the benefits, for 50 years now, of the agreements that were made at the end of WWII, coming out of Bretton Woods to create new financial architectures. Today, we have outlived the usefulness of that particular set of arrangements. And we now have to face up to creating a new architecture that will help us tackle runaway global capitalism’s worst effects; ensure social safety nets for the most vulnerable; address the debt burden that is crushing many of our poorest nations.
Bretton Woods, of course, was the last (diluted and unsustainable) international gold standard. For all of its defects, as thoroughly critiqued by France’s Jacques Rueff and Belgium’s Robert Triffin, it correlated well with high prosperity and economic justice.
Attacking it as complicit in “global capitalism’s worst effects” is odd. Donald Trump may have an opening to elevate the gold standard from a casual mention to a campaign issue.
Rasmussen also polled a more aggressively phrased version of the question. By positioning the gold standard as a way to “dramatically reduce the powers of bankers and the political class to steer the economy” support went off the charts.
Headlining gold as “everyone’s” favorite standard involves considerable dramatic license. Paul Krugman and Brad DeLong, among quite a few others, might beg to differ. Yet it indeed is many voters’ favorite standard.
The gold standard has moved from fringe to mainstream. In fortifying and fulfilling his promise to become “the greatest jobs president that God has ever created,” Donald Trump (or Hillary Clinton, for that matter) would find that the gold standard makes for great politics as well as great policy. And not so difficult to do.
Keynes also wrote:
I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
The classical gold standard has re-emerged after that “certain interval.” It by no means is the “newest” idea. Bundesbank president Jens Weidmann described gold in 2012 as “in a sense, a timeless classic.”
The gold standard, properly done, is a timeless classic for good job creation, equitable prosperity, and economic justice. The voters look like they are ready to kick out the current madmen in authority and replace their distilled frenzy with something else. Let’s hope it’s something wonderful: a standard on which to base our money.
Happy birthday, Maynard.
Originating at Forbes.com