Is a Gold Standard System Bad for the Middle Class?
October 10, 2013
(This item originally appeared in Forbes.com on October 10, 2013.)
Recently, Ralph Benko began to dig at the question: Is a gold standard system bad for the middle class?
First: the obvious. The U.S. middle class reached its peak of prosperity at the end of the 1960s. The typical one-income family could afford a house, car, decent healthcare and a college education, and still have enough left to maintain a 10% savings rate.
Yes, they had vacuum-tube television sets in those days, instead of watching TV on their telephones. But, as most anyone who was an adult at that time will attest, things were generally better. Former president Jimmy Carter said recently that, “the middle class has become more like poor people than they were 30 years ago. So, I don’t think it is getting any better.” (I think he means more like forty-five years ago.)
The United States had a gold standard policy from 1789 to 1971. At the end of that 182-year period, the U.S. middle class was the broadest and wealthiest in the history of the United States, and indeed the world.
If a gold standard system is bad for the middle class, then how is it that, after nearly two centuries of a gold standard policy, the middle class was the best-off it has ever been?
For some reason, people never think of these things.
Benko responded to some comments by Charles Postel, author of The Populist Vision, accusing a gold standard system of being a tool for rich bankers, at the expense of the middle class.
This is an accusation that dates at least as far back as the 1890s, when the Democratic Party wanted to devalue the dollar by approximately 50%, via “free coinage of silver.” (It was sort of like the “platinum coin” argument of today.) Democrats apparently wanted to relieve farmers who were momentarily caught in a situation of heavy debts and sinking commodity prices.
The 1896 presidential election became a referendum on “free coinage of silver” (devaluation). The voters (most all of them working class) chose the Republican candidate William McKinley, who promised to keep the dollar “as good as gold.”
Did the voters make the right choice? The next seventy-five years of U.S. history tells the answer. In 1896, per-capita GDP in terms of ounces of gold was 10.63 ounces. At the $20.67/ounce gold parity of the time, it was the same as $219.74.
In other words, per-capita GDP was equivalent to about eleven $20 “double eagle” gold coins, as they were minted in 1896, and formed a regular part of the currency system. Each had a little less than an ounce of gold.
In 1970, just before the U.S. left the gold standard and devalued the dollar beginning in 1971, the U.S. per-capita GDP was 146 ounces of gold — the highest this measure has ever reached. It was equivalent to 151 $20 gold coins, as minted in 1896.
The per-capita GDP of the U.S. citizen increased by fourteen times over that 75-year period — as measured in “1896 dollars.”
Was that good for the “working class”?
Is 151 > 11?
It must be a difficult question, because even sophisticated academics can’t seem to figure it out.
The Stable Money vs. Funny Money debate has been going on for centuries, indeed millennia. The Greek philosopher Plato and his student Aristotle disagreed over this point.
Since then, we have had many, many experiments with both options. What we find is that the world’s greatest success stories are universally based on Stable Money — in practice, a gold- (or, in the past, silver-) based system.
Aristotle’s student Alexander of Macedonia conquered the known world, and unified it under a silver-based monetary system according to Aristotle’s principles. Plato apparently tried to put his funny-money ideas into use in the state of Syracuse in 387 B.C. It went so badly that, historians say, the king of Syracuse sent Plato to be sold at the slave market in Corinth.
Rome’s height of glory, under Octavian, was also the time when Rome used reliable gold and silver-based money.
In the sixteenth century, the Bank of Genoa’s gold-based bonds traded at a 3% yield and infinite maturity, for nearly a hundred years, forming the commercial basis of Italian prosperity during the Late Renaissance.
In the seventeenth century, the Bank of Amsterdam’s reliable gold-based guilder enabled Holland to become the wealthiest country in Europe, with an empire that spanned the globe.
After Britain dropped its funny-money policy at the beginning of the 18th century, it soon replicated the Dutch miracle on a larger scale. Britain became the birthplace of the Industrial Revolution, and its empire soon eclipsed Holland’s.
Thus, it should be no surprise that the United States, the most successful country of the 19th and 20th centuries, also had a Stable Money policy during that time.
Today, Funny Money remains ascendant in U.S. politics, as it has since 1971. In time, the age-old lessons will be learned again. But, perhaps, not by us — the U.S. (perhaps known by then as the “FUS”) may serve as a cautionary example for others elsewhere.