A Case for the Pre-1914 Gold Standard

The gold standard, in the classical sense, would allow central banks to exchange gold for a national currency, according to a fixed weight or quantity of gold for a certain amount of currency. This is what was tried recently with rubles. Until June 30th of 2022, rubles were pegged at a hard-set rate of 5000 rubles per gram. This meant that 5000 rubles was worth approximately $52 on March 25th, but by that Thursday it was worth $63 for the same amount of rubles.

What led to this increase was the markets playing themselves out. In order for Eastern European countries to combat sanctions, they had asked friendly countries to transact in rubles. The rubles had been devalued each day up until that point. After asking that payment be made in rubles it increased the demand for rubles, so the devaluation stopped. In order to regain ground that they had lost, the ruble was pegged to gold, resulting in its rise. The quick and strong response to the ruble being backed by gold has forced the European countries to abandon the fixed rate currency and move toward a more flexible exchange mechanism that allows them to set rates that are in line with sellers and can be discounted quickly for immediate action.

In his book Tract on Monetary Reform, economist John Maynard Keynes had called the gold standard a barbarous relic and urged Western countries to abandon it. Following that book’s publication, many countries around the world had heeded Keynes advice and has left the gold standard. It is one of the greatest ironies and perhaps tragedies that almost every country in the world took up Keynes advice by the last part of the 20th century, however, none had found the benefits Keynes had touted of stability and full employment.

Keynes arguments have become the claims against returning back to the gold standard. In his analysis, he found that the gold standard was a relic of the past that was unscientific and unfit to meet the needs of a modern world. It was his arguments that have been the basis of the entire world getting off the gold standard, which is why they should be used to explain why we should be on the gold standard.

Keynes considered inflation a great injustice, however, there are instances in recent history of inflation running amok. Both the stagflation in the 1970s and today’s current inflation above 10% are the result of Keynesian economics. The most recognized economic wide value in the gold standard was it had a low average inflation rate. Inflation was lowest under the gold standard if you compare it to the Bretton Woods system. This is during the classical world standard from 1880 to 1914. Inflation, during this time, was virtually zero and as a result, prices ensured proper allocation of resources and real per capita income in the United States increased over 60% in a generation and a half. This low inflation was a direct result of when the money supply is bound up to the gold supply.