One of the main reasons that detractors of the gold standard contend it is a “barbarous relic” (in John Maynard Keynes’s phrase) is that it was implicated in so many financial panics and economic busts back in its heyday in the 19th century. As the New York Times’ pet Internet troll once put it, sarcastically, “under the gold standard, America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait….returning to the gold standard is an almost comically (and cosmically) bad idea.”
Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust. Certainly not in 1873, when the United States was still contemplating returning to the gold standard that It had abrogated in the civil war the decade prior.
Certainly not in the other famous panics of the 19th century, every one of which had at its root some form of extensive government meddling in the economy.
Not the panic of 1819—caused by the misallocation of capital owing to the U.S.’s printing, during the War of 1812, of fiat paper currency (some of which was so transparently desperate it paid interest). Not the panic of 1837, caused by undue speculation in land sparked by Congressional goading following “Indian removal.” Not the panic of 1857—caused by a collapse in railroad shares on the basis of over-investment encouraged again by federal policy.
Which brings us to the panic of 1884. Here are yearly the economic growth statistics of the five-year run from 1882 to 1886, the mid-point being that putative panic year, 1884. (GDP is a blunderbuss statistic, but at least these reconstructions don’t have to pretend that government spending is output, in that government spending was a twelfth of what it is today.) 1882-86, yearly growth came in 5.3%, 2.8%, -1.6%, 0.3%, 8.1%. Growth over the five-year period, with 1884 at the mid-point: 9.6%. By the end of the decade, the 1880s, further 28% growth (6.2% per annum) had been tacked on.
For there to be a “major financial panic,” economic growth must take a substantial and sustained hit—as in the years after 1929 and our own cherished post-2007 era. Here we have a modest trough bounded by good growth before, and epic growth after. Take 1884 off the list.
Which brings us to 1890 and 1893. Of all the panics in American history, these are perhaps the least understood and most misrepresented—with the possible exception of the tremendous recession of 1919-21, which the Times troll most very curiously did not mention (which is OK, since none other than James Grant is on the matter).
Saying that there was a panic in 1890 is weird, in that growth was some 9% that year. In 1891, growth tumbled down, but stayed positive, at 1%. Growth surged again in 1892, to at least 10%. Then the sustained drought came: growth fell by fully 10% through 1894 and took till 1897 to recover the old trend of sustained increase.
This was the desperate panic/bust of 1893, which gave us the Haymarket riot, the Pullman strike, mass bankruptcies, and the word and very much the fact of “unemployment.” Right smack in the middle of the gold-standard era.
Or was it? It is perfectly clear what caused both the huge run-up in output numbers from 1890-92, as well as the tremendous stress on the banking and credit system that led to the drying up of investment and the shuttering of factories in 1893 and beyond. The United States, in 1890, decided to traduce the gold standard.
1890 was the year in which Congress made two of its most intrusive forays into monetary and fiscal policy in the years before the creation of the Fed and the income tax in 1913. It authorized the creation of fiat money to the tune of nearly five million dollars a month, and it passed a 50% increase in tax rates in the principal form of federal taxation, the tariff.
The monetary measure came care of the Sherman Silver Purchase Act, whereby the United States was mandated to buy, with new paper currency, an additional 4.5 million ounces in silver per month. The catch: the currency that bought the silver had to be redeemable to the Treasury in gold too.
Silver-mining interests in Nevada and elsewhere had conned (and surely bribed) Congress into this endeavor. Knowing that their extensive silver was worth little, what better way to cash in on it than get a piece of paper that says the silver can be exchanged for gold, government-guaranteed?
The cascade of new money caused an asset bubble, the tariff made sure the bubble was especially deformed, and the most extended recession of the pre-1913 period hit. The United States, needless to say, ran out of gold to back all the extra currency. J.P. Morgan had to float a gold loan to bail out his pathetic government. With the private banking system devoting its resources to propping up the United States, the market got starved of cash, and the terrible recession came.
To believe that this ridiculous episode impugns the gold standard is to miss the point, and badly. Any currency that is on the gold standard can have its manager ruin the monetary system if so disposed. If you print gobs more currency than you could conceivably redeem in gold, because some con man from out West got to you, the grim creeper will come for you and your economy. So avoid that fate.
In our own era, the Fed prints excess dollars without concern that they be redeemable in gold. Which means that our capital misallocation is extensive and long-term, our recessions are long and deep, our growth trend is shallow, and our complacency about how right we are in contrast to the benighted past is callow and pitiable.
This essay first appeared in Forbes and is republished here by gracious permission of the author.
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