The Gold Standard Wasn’t So Bad

(Originally published here.)

David Stockman, a former Republican congressman and director of the Office of Management and Budget, has been receiving a lot of criticism for his apocalyptic take onthe state of American capitalism. Some of the critiques are justified, but others go too far. It is incorrect to describe the U.S. under the classical gold standard (roughly 1870 to 1913) as a “dystopia,” as Matt O’Brien did in the Atlantic. Even if you think that the gold standard would be inappropriate right now, the data do not indicate that it was obviously inappropriate then.

Academics have investigated this before. Christina Romer, a Berkeley professor and former adviser to President Barack Obama, wrote the go-to paper in 1999. She found that “real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras.” In other words, even if you exclude the Great Depression and the recent crisis, the classical gold standard didn’t make the economy more volatile.

The gold standard wasn’t bad for growth, either. The most reliable information comes froman annual index of industrial production from 1790 to 1915. We can compare that index against the monthly industrial production data collected by the Federal Reserve since 1919 to get a sense of how rapidly the economy grew under different monetary arrangements. It turns out that industrial production grew much more rapidly under the gold standard than in the years since. This doesn’t change even if you exclude the world wars and the Great Depression.

Source: National Bureau of Economic Research and the Federal Reserve Board

Source: National Bureau of Economic Research and the Federal Reserve Board

Some of the extra growth in industrial production can be attributed to rapid population growth. O’Brien helpfully points us to data from MeasuringWorth on real gross domestic product per capita. He concludes that the “golden” years were actually the worst years. But the numbers suggest a different interpretation. As you can see, real incomes per person grew slightly more slowly under the classical gold standard than in the postwar years, but not by very much.

Source: MeasuringWorth

Source: MeasuringWorth

Finally, there are subjective measures of welfare. Robert Gordon, an economist at Northwestern University who is an expert on productivity, notes that the greatest qualitative improvements in the U.S.’s standard of living occurred between 1870 and 1900. This doesn’t necessarily mean that the classical gold standard promoted innovation and progress, but it does suggest that the gold standard wasn’t a significant obstacle.

The monetary arrangements of the 19th century worked well for the time. We shouldn’t forget that in our haste to criticize today’s pundits.

(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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