Better Performance On a Gold Standard

From the Wall Street Journal:

From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable—the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

What’s happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.

Interest rates, too, have been high and highly volatile, with the yield on triple-A corporate bonds averaging more than 8% and, until 2003, never falling below 6%. High and highly volatile interest rates are symptomatic of the monetary uncertainty that has reduced the economy’s ability to recover from external shocks and led directly to one financial crisis after another. During these four decades of discretionary monetary policies, the world suffered no fewer than 10 major financial crises, beginning with the oil crisis of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis and potential currency war of 2010. There were no world-wide financial crises of similar magnitude between 1947 and 1971.

Quite the contrast isn’t it?

On October 28th, 2010, posted in: Economy by Tags:
2 Responses to Better Performance On a Gold Standard
  1. Johnathan Stein
    October 31, 2010 at 9:05 pm

    The data from 67-71 is conveniently not included in the averages. A little cherry picking, perhaps?

  2. I noticed that too Johnathon and the author acknowledges it by saying that 67 is “the year before the US began to weasel out of its commitment to dollar-gold convertibility”. In fact, the US was already having problems maintaining the peg in the early 60s. Cherry picking? Sure if you insist. It doesn’t change the basic fact that the fluctuating value of the dollar has caused immense problems since Nixon closed the gold window. As just one example, consider the growth of the derivatives industry which exists to mitigate the damage caused by volatility. A stable dollar in terms of gold reduces volatility of commodity prices (reducing standard deviation by at least a third and maybe more) and interest rates, among many other things. The need to hedge wastes capital and increases uncertainty (risk). Think of the capital that could be freed up for more efficient uses if the dollar were stable.

    A gold standard is not perfect but it is a lot better than the current system.


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