I’ve seen the gold standard blamed for a lot of things in my day—the busts of the 19th century, the travails of the farmer back when, the Great Depression—but I’d never thought I’d see the blame for the serial economic crises we’re enduring today, in 2012, hung on the gold standard. After all, isn’t the gold standard long gone? Never say never, because here’s the headline that came last Friday, care of Project Syndicate: “Is Europe on a Cross of Gold?”
The article was written by Barry Eichengreen, the Berkeley economics professor and longstanding deprecator of gold. Alas, it disappointed; the headline was misleading. In the article, Professor Eichengreen had some things to say about gold’s culpability in past crises, but he did not bring himself to implicate gold in the Euro-travail of today. The article said that though the current European crisis has shades of old gold-era crises, it remains substantially different.
All right. The gold standard is not to blame for the current crisis. Good to hear. But do we have to have Barry Eichengreen piling on the old gold standard once again as he did in the introduction to the article? For Eichengreen has done more than arguably any other individual to create and sustain the false impression that the gold standard caused the Great Depression.
Here’s what professor Eichengreen said in the article:
“I wrote the book on Europe and the gold standard. Literally. In Golden Fetters: The Gold Standard and the Great Depression [1992], I argued that the deflationary engine that was the gold standard was a key cause of the 1930s depression, and that abandoning it opened the door to recovery.”
Now hold it right there. There is only one valid title, and it isn’t Golden Fetters: The Gold Standard and the Great Depression, that can issue from the following sentence: “I wrote the book on Europe and the gold standard. Literally.” Because the gold standard was generally in operation in Europe from the 1870s to 1914, sometimes before this period, but most certainly not after. The title has got to be something like The Great Gold Years: The Plumpest Prosperity the World Had Ever Known, 1871-1914. Heck, didn’t Roger Shattuck write a book about this period called The Banquet Years?
The specific confusion Golden Fetters has sparked unfolds like this. A gold standard prevails when currencies are freely convertible to gold at a set price. Yet this was not so in the post-1914, particularly the post-1922 years. Then, the convention was that currencies were freely convertible not to gold—but to other currencies that were themselves theoretically convertible to gold (read: the dollar and sometimes the pound). Not a gold standard—but some shady simulacrum of it. Hence Barry Eichengreen cannot claim, as he does, “I wrote the book on Europe and the gold standard. Literally.”
As for freely convertible, that was kind of a hash too, and before 1929. Here’s what the British Prime Minister told his French counterpart in 1928 (a quotation care of the great monetary master Jacques Rueff): “We know that you are entitled to ask gold for our sterling [the pound], but in the frame of the close friendship between Britain and France we ask you, so as to avoid trouble…, not to do that.” In other words, in the 1920s, we had a world of fiat currencies unmoored by constraints to gold or convertibility. Barry Eichengreen “wrote the book on Europe and the gold standard” and concentrated on these years? Makes no sense.
When Robert A. Mundell won his Nobel Prize in economics in 1999, he spoke of the causes of the Great Depression in his acceptance speech. He said: “The massive literature on the subject has generated more heat than light.” Surely Mundell had Eichengreen’s enormously influential book in mind. For Golden Fetters has inured a generation’s worth of economists to the idea that the gold standard caused the Great Depression. Ben Bernanke, judging from a fawning review of the book he wrote when it came out, certainly fell for it.
As I have written in this column before, the thing that central banks did in the era of the Great Contraction, 1929-1933, was the one thing that you never do when you’re on the gold standard and a crisis is afoot. Namely, the central banks and other sundry monetary authorities strove to hoard gold, to collect it like they had a fetish for it. Certainly this was the case in two of the biggest players, the U.S. and France.
What you’re supposed to do, when on gold, and there’s a crisis, is monetize it so that the crisis passes. “Lend freely at high rates” and all that from the good old gold standard days. The opposite happened in the Great Contraction—again lending more dubiousness to Eichengreen’s claim of having “written the book.”
Fiat money coupled with gold hoarding—the characteristics of 1929-1933. This was a world on the gold standard? Professor Eichengreen keeps saying so, but that doesn’t make it correct. As we grope toward a better monetary system in our own day, it’s time to get right about what worked and didn’t work in the past, and this means improving our rhetoric about the gold standard.
For more on the Gold Standard and Political Economy, visit The Imaginative Conservative Bookstore. This essay originally appeared on Forbes.com and appears here by the gracious permission of Brian Domitrovic.
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