Academia has abandoned any serious interest in understanding a gold standard. Going back to Amsterdam in the late 1600s, there is a 300-year history of successful implementation of gold standards among developed countries. Data is available to study the result of growth rates and economic progress during gold standard years. Great Britain began its successful era of the Gold Standard in 1698, and it lasted until the outbreak of WWI. The fledgling U.S. in 1792 copied Great Britain’s monetary success and instituted a gold standard that lasted until 1971 when Nixon terminated Bretton Woods and ushered in our current floating fiat system. Under a gold standard, the sun never set on the British Empire, and the U.S. rose to the top of the global economic pyramid. The late 19th century saw the heyday of the Classical gold standard when every developed country linked their currency to gold. During this era, the world experienced the efficiency of a single currency of unchanging value: gold. The result was a free flow of trade, economic growth, an increase in the global standard of living, and a leap in industrial progress.
How a gold standard operates and its economic history is not a mystery. Nathan Lewis has chronicled the history in a trilogy of books: Gold: The Once and Future Money, Gold: The Monetary Polaris, and Gold: The Final Standard. Nathan’s economic writings encompass the history of a gold standard at his website newworldeconomics.com. Despite a lack of university-level study, alternative sources are available that accurately explain a gold standard’s operating mechanics and history.
Anyone with a curious mind can expend a bit of effort and learn the basics of a gold standard. Indeed, the global population inherently understand gold. There is a universal understanding that gold’s value does not change. Parachute into any spot on the planet and the people there will accept gold as a means of exchange. During periods of chaos and strife, it is gold that people turn to for a safe monetary haven. Gold is no doubt the currency of choice for any Venezuelan attempting to survive their country’s destructive hyperinflation.
With this background in mind, there emerges a tweet from Neel Kashkari, president of the Minneapolis Fed. One would hope that a Fed official with voting responsibility for setting the monetary policy that determines the value of the world’s reserve currency would have a rudimentary knowledge of monetary history. Kashkari tweeted:
Thanks, but imagine we abolished the central bank and went back to gold standard. The money supply, and hence inflation rate, is then set by gold miners and how much gold they happen to dig up in a given year. That makes no sense.
Kashkari obtained undergraduate and graduate mechanical engineering degrees. He has an M.B.A. from Wharton and is an obligatory alumnus of Goldman Sachs. Paulson brought him to Treasury where he ended up involved in the TARP program. That’s a natural stepping stone to regional Fed President. I am all for citizen economists and believe an economics degree from our monolithic Keynesian demand-side universities is an economic step backward. The Fed Ph.D. cabal and their attempt to shoehorn behavioral economics into one-size-fits-all mathematical equations are errant and destructive. It is no wonder that the Fed’s economic prognostications are perennially wrong. Despite the competing theories of various economic disciplines, a prerequisite for elevation to Federal Reserve Bank President should require knowledge of the history of monetary policy.
Does Kashkari believe that during three centuries of functional gold standards gold miners determined the global money supply by how much gold they “happen to dig up in a given year?” Nathan Lewis has adopted the odd intellectual concept of objectively looking at data. He writes:
From 1880 to 1970 U.S. base money expanded by 69x. (Adjusted for FDR’s 1933 devaluation of gold from $20.67 to $35/oz, the “gold value” expansion of base money was 41x.) During the same period total world gold supply expanded by 6.51x. Again, under a gold standard, there is no connection between the availability of gold and a currency manager’s ability to expand supply as needed.
A gold standard requires adjustment of the supply of a currency to maintain a parity price with gold. A central bank, free banking, or some other type of currency manager must accomplish supply adjustment to maintain a gold standard. Kashkari’s statement that going back to a gold standard requires abolishing the central bank is another dive into the intellectual shallow pool.
Ben Bernanke has no apparent understanding of gold as evidenced by his Fed Chair tenure. However, after his nomination to Fed Chair, he demonstrated an honest intellectual curiosity in a long exchange with Jude Wanniski. Here is a link to the exchange. It is one of the more enlightening economic discussion that you will find anywhere. Neel Kashkari and all Fed officials would benefit by a serious reading of the Bernanke-Wanniski exchange. Neel would also benefit by refraining from tweeting about gold.