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:

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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.

  • $\begingroup$ In general, I take everything Steve Forbes writes (or I should say, everything with his name on it, because who knows if he actually writes it) with a huge grain of salt. There are many great minds out there, and I don't count Steve amongst them. Good for you for questioning his sweeping claims. $\endgroup$ Sep 27, 2023 at 5:42

1 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.

  • $\begingroup$ "ushered in" has been over-interpreted in the question. Forbes is going to respond that he never said leaving the gold standard was the sole cause of the energy crisis. He never even said the Nixon shock, of which the gold standard was only one of several listed components, was the sole cause of the energy crisis. He just said it somehow "ushered" it. Invited it? Happened shortly before it with no causative link? It's vague. $\endgroup$ Sep 27, 2023 at 1:20
  • $\begingroup$ Oh, and then you might have over-interpreted the question, which does not contain the word "cause"! It does contain the words "made worse"... $\endgroup$ Sep 27, 2023 at 1:27
  • $\begingroup$ FWIW, gold standard in multiple countries I believe also puts countries into (more) competition with each other to buy gold, in order to sustain even moderate levels of inflation. If I want 1.2% inflation forever, and you want 1.2% inflation fixed forever, then we both have no choice to increase our gold reserves by 1.2% each year. What if nobody wants to sell at the gold standard price, despite us both claiming that our currency is worth 1g of gold? We either fall off the gold standard or accept uncontrolled negative inflation. The fear we will do the former destabilises the currency anyway. $\endgroup$ Sep 27, 2023 at 1:34
  • $\begingroup$ Ultimately somebody says, "nah, actually, I'd rather have the gold than the dollar", and the currency becomes unusable internationally as a means of exchange. I have no idea whether that would have happened in 1970, though, or just "somewhere down the line, inevitably, due to some crisis or other, but 'eventually' is a very long time". If you don't want the size of the world economy to be constrained by gold miners, you either have to take negative inflation or you have to come off the gold standard. $\endgroup$ Sep 27, 2023 at 1:39

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