The prospect of a Federal Reserve Board nominee in Judy Shelton has led to all sorts of commentary about how kooky the gold standard is. Judy Shelton has said favorable things about gold and the monetary system, and on have come the charges that no serious economist advocates gold, gold limits flexibility in a crisis, gold is not modern, gold-standard people are “goldbugs,” gold played a major role in causing the Great Depression, etc.
We just had to fight WWII. Washington DC, USA. photocredit: Getty
About that last point. Is it ever a verity in contemporary economics. Yet as Nathan Lewis has shown, prior to the mid-1980s, the view that there were gold-standard causes of the Great Depression had no adherents, including across the mass of progressive academia. Things changed with work of once-of-Harvard economics professor Barry Eichengreen that charted how adherence to the gold standard in the 1920s and 1930s correlated to the degree a country fell into the Great Depression. Today at places like the National Bureau of Economic Research, it is au courant to point out that on Franklin D. Roosevelt’s suspension of the gold standard in 1933, the nation grew like never before.
Bash, bash, bash. Economists surveyed by the University of Chicago—such a top place, and how rigorous it is!—found zero support for a gold standard. As John Tamny beautifully pointed out, even John Cochrane of the Hoover Institution had to show to progressive academia that he’s no kook by broadcasting his opposition to gold. Here comes tenure.
Big happy professional consensuses have one nasty collateral intellectual effect. They lead to stunning complacency about important issues. Take history, in fact the central events of the 20th century, the Great Depression and World War II. The consensus on gold has done major harm to our understanding of these events.
The first point in the consensus is that the major nations’ going off gold through 1933 curtailed the Great Depression, which was at its most severe from 1930-33. The United Kingdom, for its part, went off gold in September 1931, at the very moment the Japanese, with the invasion of Manchuria, began what would develop into World War II. Mere correlation? The former president of the American Historical Association, Akira Iriye, has written the following concerning the early 1920s Washington conference of the powers relevant in East Asia:
“All the Washington signatories were linked to one another through their acceptance of the gold standard….[T]he mechanism called upon nations to accept gold as the medium of international economic transactions, to link their currencies to gold, and to maintain the principle of currency convertibility. Through such devices, it was believed that commercial activities across national boundaries would be carried out smoothly for the benefit of all.”
A trade-dependent nation witnessed the elimination of the agreed-upon basis of international currency convertibility and right away took untoward steps. Preliminarily, it appears that going off gold touched off the first stages of World War II.
As for FDR, to Iriye he “showed a willingness to give up the principle of international co-operation to preserve the gold standard in favor of a more flexible policy that would enable the nation to act unilaterally to regulate the price of gold and the rates of exchange between America and other currencies. Roosevelt was determined to focus on domestic recovery and showed little inclination for becoming bogged down in international issues.”