Editor Mark O’Byrne
Going off gold did the opposite of what many people think FT Alphaville
Surprising findings show benefits of Gold Standard
Study by former Obama advisor in 1999 and speech by Bank of Englandeconomist in 2017 make case for gold
UK economy was ‘much less prone to extremes’ under than the gold standard research shows
‘Gold standard seems to have produced fewer catastrophes for Britain’ data shows
FT still wary of gold standard arguing ‘stability can be overrated and growth is worth having’
Findingis not surprising and joins a wealth of evidence and research that shows gold’simportance as money, a store of value and safe haven asset
300 years ago last week on the 21st September, 1717 Sir Isaac Newton, Master of the Royal Mint of Great Britain, accidentally invented the gold standard.
Last month it was the 46th anniversary of President Nixon ending the gold standard. Since then the world has existed on asystem of fiat paper and digital currency. It works so badly that it has lead to the global financial crisis, unending debt issues and a dramatic devaluation in sovereign currencies.
Despite this, much of the media and central banking system remain supporters of the current financial and monetary status quo.
They are so convinced that the time before fiat money was a disaster that anyone who suggests otherwise is labelled a gold-bug and told to move along.
Last week, there was a glimmer of light when the Financial Times’ Matthew C. Klein uncovered some 18-year old research into the gold standard and a recent speech by a Bank of England economist.
Mr Klein although a young man has quite an impressive journalistic c.v. Hewrites for FT Alphaville and Bloomberg View about the economy and financial markets.
He previously wrote for the Economist magazine and before that, Klein was a research associate at the Council on Foreign Relations (CFR), where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics.
Going off gold did the opposite of what many people think
Klein writing inFT Alphavilledraws on research from former economics advisor to President Obama, Christina Romer:
Imagine you can choose between living in two kinds of societies:
- Dynamic world prone to wild swings and big crashes, but ultimately more growth in the long run
- Safe and stable world with greater consistency, less volatility, and much lower risk of catastrophe
You might think that Americans and Europeans effectively decided to move from option 1 to option 2 between the late 19th and mid-20th centuries. Depending on your politics, you might attribute this to the stultification of modernity, or the triumph of the enlightened welfare state.
Regardless, you would be wrong.
The growth of government as a service provider and guarantor of financial security – backed by fiat money – has actually coincided with faster trend growth and greatervariance around that trend line. Moreover, the likelihood of particularly bad events has increased since the escape from the golden fetters.
Klein refers to this and subsequent information from Romer as ‘surprising findings’. They are not likely suprising to Klein but would be too many FT readers given its generally negative stance towards gold in recent years.
The gold standard: Reduced volatility
Klein reports that in 1999, Romer made some interesting findings regarding the stability and volatility of various business cycles in the 20h century.
The findings initially suggest results that would make modern bankers rest on their laurels in terms of how they manage things today, but dig deeper and things don’t look so straight forward.
He reports that Romer concluded:
that business cycles had roughly the same amplitude both before WWI and after WWII. Volatility was slightly lower in the modern period:
But this was entirely attributable to the unusual calm of 1985-1997:
Given what’s happened since then, the pre-WWI period might look more stable than the era of the countercylical Federal Reserve. Romer measured the severity of a downturn by looking at how far industrial production fell from its peak and how long it took to return to its old level. Using her method,the financial crisis was about as painful as the depression of 1920 and the contraction of 1937 – and about 2.5 times as bad as any post-WWII downturn.
Bank of England’seconomist makes case for gold
Gertjan Vlieghe, an economist and former economic assistant to Lord Mervyn King at the Bank of England, gave a speech last week entitled ‘Real Interest Rates and Risk’.
The speech presented research on andlinked the history of interest rates, economic volatility, and stock market returns.
As Klein points outin the FTthe most important part of the speech is most likely to the be most underreported.
Vlieghe’s research finds that whilst the UK economy off the gold standard was better at allocating resources, the dangers it brought to the financial system made it more fragileandlead to a financial crisis.
Vlieghe at the Bank of England says:
I suspect the increase in the importance of private sector debt and financial intermediation plays an important role, which in turn was facilitated by moving off the gold standard. An economy where debt and financial intermediation play a more important role can allocate resources more efficiently and achieve a higher growth rate, but also becomes more fragile. Small set-backs can have amplified downside effects and even lead to a financial crisis
Klein draws our attention to an interesting chart presented as part of Vlieghe’s speech.
The table, based on nearly three centuries of UK data, shows that