A Monetary System Based on Legalized Theft

Greetings from Sedona…

I have a personal mantra for analyzing data and disputes which is, “But is it true?”  This comes into play when an argument is based on an assertion of fact not backed by raw data.  It is amazing to me how often I find the answer to my mantra is a resounding NO!!!  Few issues yield more debunkable myths than the gold standard.

The two most often cited historical references by critics of the gold standard are the alleged poorly performing, panic and depression ridden economy under the classic gold standard, and that the gold standard exacerbated the great depression.  Since a very thick tome could be written about each reference, I will mercifully concentrate on just three narrow items.

The period known as the classic gold standard encompasses the decades following the civil war, ending with the creation of the Federal Reserve.  When one looks at the official Gross National Product data we are led to believe the economy was contracting about two thirds of the time.  Unfortunately, the official rendition of the period’s economy is wildly inaccurate!!  Before entertaining thoughts that I am a conspiracy nut, please read on where we will look at two simple, objective components of economic performance that prove my case.

The most basic factor of “gross” economic performance is population growth.  This is especially important for the post civil war period because humanity was still challenged by the constant quest for calories, unlike today where we are challenged by an overabundance of same creating our obesity epidemic.  In other words, back then starvation was still an ever present problem for the average person.  Therefore, a rising population is powerful evidence of a growing economy.  Everyone has to eat enough to survive.  More people means more consumption of food, which in turn has to be produced – feeding into the most important part of gross national production during that era.

The first census following the civil war in 1870 shows a population of about 38 million people.  Now we can debate the accuracy of this figure, but I submit that population is far easier to calculate or estimate than the production of all goods and services in the economy.  Furthermore, the census is a contemporaneous figure while GNP figures are estimates for that period which were created many decades after the fact.

The 38 million figure is not cited for its precise accuracy, but merely to give a rough basis for comparison to the population at the end of the period of the classic gold standard.  The Federal Reserve was created in 1913.  Therefore we must look to the last census preceding that date – 1910.  In 1910 the population of the United States was about 92 million people.  Now let that sink in for a moment.  The US population launched from 38 million to 92 million in just 40 years!!!  That is a 140% increase!!!.  How could this be if the gross production of the nation was contracting two thirds of the time and ridden with panics and depressions?

This contradiction shown by a very simple piece of data can only be explained if the standard of living (real per capita income) was declining rather dramatically considering the astonishing rate of population increase.  Unfortunately for the anti-gold critics, the standard of living during the period was soaring as well.  The most fundamental factor of the general standard of living is life expectancy.  Fortunately, life expectancy is a standard statistical calculation based on births, deaths and age at death.

While there are many ways of slicing and dicing these figures and many life expectancy calculations, the most common is life expectancy at birth.  In 1870 the life expectancy at birth was only about 38 years.  By 1910 life expectancy at birth had reached about 51 years.  This is an amazing increase of 34%!  This could not have happened if living standards and real per capita income were declining.

Clearly, the classic gold standard period was one of overall boom.  Looking at it another way, we built a continent on our way to becoming the richest, most powerful nation the world had ever seen at the dawn of World War I.  The reasons for the wild inaccuracy of the official data are many, having relevance even for today’s economy, but well beyond the scope of this discussion.

Critics also claim the classic gold standard leaves the economy vulnerable to depressions and panics.  During the classic gold standard period easily the greatest downturn occurred during the early 1890’s.  Austrian economic theory postulates that all significant economic downturns are the result of government action.  The 1890’s depression was no exception.  It was caused by the McKinley tariff and the inflationist push for a bimetallic silver/gold standard.

The protectionist McKinley tariff resulted in large price increases for protected Republican Party big business interests which unmercifully crushed the budget of the average person.  This was the proximate cause for the defeat of Republican Benjamin Harrison and the unique return of the split two term presidency of Grover Cleveland in the election of 1892.

The call for a bimetallic monetary standard was prompted by western agricultural interests seeking easy money, because silver was relatively plentiful thanks to large recent discoveries.  This was at its root a theft of value from those holding dollar denominated instruments, which of course were based on gold.  A bimetallic standard would have reduced the gold these financial instruments (bonds, bank accounts, etc.) would redeem.  Therefore, holders of these instruments cashed out and demanded their gold – a perfectly reasonable response by people who will naturally seek to protect themselves from outright theft.  This caused a financial crunch which ended only when Grover Cleveland killed any idea of a bimetallic standard.

The third criticism we will review here is the ridiculous assertion that the gold standard exacerbated the great depression.  Whenever holders of financial assets become concerned about bad government behavior they will rightly turn those assets in and demand their real money – gold.  This happened during the 1890’s as discussed above.  It also happened during the onset of the great depression of the 1930’s.

The schoolbooks teach that Hoover was a heartless laissez faire president who fiddled while the country’s economy crashed and burned.  If only that were the case – there would have been little demand to hold gold.  Instead, Hoover was an activist, big spender under whom federal outlays and the deficit soared.  This not only worsened the downturn, but naturally caused holders of debt instruments to worry about the historical precedent of deep devaluation.  Therefore, they demanded the government redeem their notes in gold.  Of course they were correct as the Roosevelt administration quickly devalued the dollar from about $20 per ounce of gold to $34 per ounce, or a huge 70%!!!!

Critics of gold and apologists for today’s fiat currency standard decry the lack of monetary flexibility of the gold standard.  What the gold standard really does is severely restricts the ability of the government to steal from you.  Today’s monetary system sanctions stealing.  Mainstream economists elevate theft to a preferred, even essential economic policy.  FDR’s theft of 70% is today hailed as a great policy measure by nearly all segments of economic theorists and policy wonks.  Immorality is therefore now firmly institutionalized in our government and our economy.

There are no contradictions.  Bad morals and ethics is bad business and bad economic policy.  Put another way, a monetary system based on legalized theft cannot stand.  Dead ahead we face the chaos that will prove it beyond any doubt.

Stephen Reiss

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