Lunacy and Confusion over the Gold Standard

It drives me crazy when I read stuff by “economists” that is just plain wrong. Some of them are allegedly “MBAs” and “PhDs” but I think that their common sense is actually “DOA”.

Unfortunately, millions in the public arena see their interviews and blogs and they seem to automatically swallow their commentaries… hook, line and sinker. Let’s address some of the nonsense that these pundits are expressing.

Some conventional and well-known economists have expressed the idea that a gold standard is a bad idea and that the gold standard was a major (and possibly THE major) catalyst for the Great Depression. One well-known fellow surmises that an equivalent of the gold standard is the reason why today’s European financial crisis is going on. In due course, I am sure that they will blame the gold standard for global warming and probably the heartbreak of psoriasis.

I have expressed myself on this topic in video venues such as at Preciousmetalsinvesting.com and at my Youtube channel (You can look up “PaulMlad”) but the topic deserves attention here.

The case can easily be made that most financial crises have occurred when governments didn’t use a gold standard (or any type of standard).
The point that critics make is that the gold standard “removes financial flexibility” when a system-wide financial crisis unfolds. They don’t like a gold standard because it is viewed as a “rigid constraint”.
In a monetary system that is on the gold standard, the amount of currency you can produce at will is indeed greatly constrained since the amount of currency (dollars or euros or whatever) is limited to the amount of gold that is on reserve. This condition puts the breaks on the unlimited creation of a currency.
The real problems behind today’s (and yesterday’s) financial crises and depressions have nothing to do with constraints such as a gold standard; the problems come from mismanagement of spending and debt… and governments that are too expansive in their size and scope.
Economists don’t blame governments for spending too much or creating too much debt or printing up too much of their currencies; they blame whatever may stop them from doing so (such as a gold standard). This is insane; it is like blaming the seat belt for a car crash.

Imagine for a moment if a financial planner took the same line of thinking with their client. How would that go?

“Well Mr. Smith I see that you are spending way beyond your means and you are taking on a lot of debt as a result. You are now hitting your credit limit! Well…the problem is obvious to me! Your spending and debt are not the problem…I blame the credit limit! The creditor is not letting you borrow your way out of your excessive spending and debt! Yup… I blame the credit limit.”

Could you imagine that? But that is essentially what these “educated” commentators are telling the public. The public confuses “eloquence” with common sense. They figure these guys “must know what they are talking about” since they “sound pretty smart”. Ugh…

We must remember that the gold standard was present when America had the depression of 1920-21 and we got through it and then proceeded into the roaring twenties. What’s that you say? You never heard of the depression of 1920-21? That is because the government did very little to intervene and the economy righted itself very quickly.

…But how about the Great Depression?

FDR effectively removed the constraints of the gold standard in 1933. However, the Great Depression continued… for over a decade! The Great Depression did not end until AFTER World War II ended (in 1945).

Look, we may not need a classical gold standard; but we need SOME type of standard. The essential point here is that our governments need some type of restraint… otherwise they will continue to spend and spend and create more and more debt. Standards and restraints on endless money and debt creation do not cause financial catastrophes and depressions.

But it is the lack of this constraint (gold standard or a modified version of one) that opens the door to catastrophe.

This is why I tell my students and readers to become as self-reliant as possible (financially and otherwise) since we are at risk as today’s economic ills get worse.

Unfortunately for pundits and economists, there is no “standard” to blame for the trillion-dollar disaster that is unfolding before our eyes today and in the months to come.

Be prepared…

Gold and the Great Depression; the Great Myth

October 24, 2010
By Paul Mladjenovic
Copyright 2010 Paul Mladjenovic. All rights reserved.


As I peruse the usual financial sites that I am also fortunate to be on, I noticed an article that made a reference about gold and the Great Depression. The writer normally covers investing and the financial markets but this time he veered into a topic that I have had a keen interest in since my college days; the Great Depression.

Just know that the causes and issues of the Great Depression are not bygone events; They are very relevant to today’s economy and financial markets.

I will try to keep this article short but I read something in his piece that compelled me to address it. He writes:

“…We no longer have a gold standard, which is a GOOD thing.
The gold standard of years past…was largely to blame for the Great Depression.”

Now, keep in mind that I normally think that this writer offers good commentaries and I wish him well. Readers will find his views on financial markets very useful. However, I can’t let items like this pass by without commentary. Let me state the main point of my essay:

The Gold standard had NOTHING to do with creating the Great Depression.
Absolutely NOTHING!

Blaming the gold standard for the Great Depression would be like blaming a seat belt for a multi-car crash. It defies common sense and logic.

In fact, had the federal government adhered to a gold standard, it would have curtailed the dangerous over-production of fiat currency. Remember that the first event of the Great Depression was the collapse of the stock market in 1929. This event was largely due to the government’s reckless creation of easy credit and a currency bubble (sound familiar?). If America’s central bank, “the Fed”, was constrained by a gold standard, a bubble would not have been created in the first place. A gold standard puts a “straight jacked” on reckless currency inflation.

We must also keep in mind that the Great Depression was not a singular event…it was a series of events induced by federal government blunders that hurt (and suppressed) economic activity for over a full decade.

Massive, stifling regulations (such as Smoot-Hawley) were implemented along with oppressive tax rates (hitting 96% by World War II!) that kept the economy struggling throughout the 1930s. From massive stimulus spending, the government burden grew beyond the economy’s ability to carry it (does that also sound familiar?).

In addition, federal wage policies made hiring employees too expensive and this forced unemployment to stay at artificially high levels for years. It can not be emphasized enough; depressions are NOT caused by a private, free market economy. The culprit is government.

Lastly, the next persistent myth was that that World War II got us out of the Great Depression.

Wrong! Wrong! Wrong!

World War II only gave us the ability to give the unemployed a uniform and a gun and ship them overseas.
War doesn’t solve economic problems…it creates them. If war actually helped an economy then the answer is simple; produce a million bombs and then dump into in the ocean! Wouldn’t that create prosperity?! Of course not!
War is actually the most obvious example of the “broken window fallacy” that the great Henry Hazlitt so ably described in his book, “Economics in One Lesson” (available at Fee.org).

Before we make the same destructive mistakes (which have been happening in recent years anyway, it seems), we need to understand the truth because the causes and symptoms of depressions and recessions. A good place to start would be to go the Mises institute website (Mises.org) and get a copy of Murray Rothbard’s excellent book, America’s Great Depression.

The bottom line is that if America (our government, actually) adhered to a gold standard, we would be much, much better off than we are now.

The sooner we learn the lessons of history (and the value of gold and a gold standard), the sooner we would be much more prosperous.

Until the government its their act together (never?), we need to take measures to protect our personal prosperity. Accumulating gold and voting for those that want to severely limit the government’s role in meddling in our private economy are good for starters.

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Paul Mladjenovic, CFP is the author of the ebook “Financial Firewall: How to Protect your Money and Investments in the Age of Financial Chaos” and he also does national seminars on investing and financial planning concerns. He is also the editor of the free financial newsletter, the Prosperity Alert ezine, which is found at www.RavingCapitalist.com.