Is Steve Forbes factually correct when he says that all of our economics problems are made worse by leaving the gold standard?

Question

When I started reading Steve Forbes book Inflation I was surprised by his confidence in making statements about the impact of leaving the gold standard.

The book is clearly written and goes against much of what I have heard second-hand about the gold standard. Here a quote from the introduction:

I ask this from the perspective of understanding whether his claim is controversial (possible but not established), mostly accepted (most experts would agree with the conclusion), one of the standard viewpoints (accepted by many experts but not necessarily a majority), or not widely accepted by experts (only a strict minority would agree with this conclusion).

I ask just to get a better context on how I should read the book. Steve Forbes is so clear in his ideas and in his writing that he makes a compelling case. I am not an expert and worry that without this context, I may not be reading the best reference to get an expert viewpoint.

Answer 1

1. It is not controversial to state that inflation was lower under gold standard. Under gold standard quantity of money in economy is strictly limited by amount of gold, and money supply can only grow as more gold is acquired. This hard limit typically historically resulted in very low levels of inflation outside some periods when there was high influx of gold, like when conquistadors brought mountains of gold from the New World to Europe (see Ferguson Ascent of Money pp 17-65).

2. It is not true that this would cause 'all economic problems', although I do not see where he says that in the passage you quote. Great Recession was primarily result of moral hazard and bad and insufficient regulation (see Eichengreen Hall of Mirrors). Loose monetary policy played only small role, and Fed could also pursue looser monetary policy under gold standard to certain extent. However, it is certainly not primary reason for 2008-09 recession.

   It also did not caused 1970 energy crisis as that was result of OPEC cartel, and I can't see any possible way how gold standard would prevent OPEC cartel.

   It could be argued that inflation would today be lower under gold standard, however, that would be primarily result of policy choice (i.e. Fed could always pursue very strict monetary policy that would mimic gold standard if it would wanted to). Moreover, gold standard, if pursued by more than one country would have negative effects on economy as it would force all economies on gold standard to be on fixed exchange rate, which does not allow economy to adjust to assymetric macroeconomic shocks. Moreover, it might also lead to worse recession to the extent it restricts the kind of policies central bank can pursue to stimulte the economy.