Pragmatic Capitalism

Practical Views on Money, Finance & Life

Debunking the Myth that a Gold Based Monetary System Leads to Higher Growth & Greater Stability

One of the most common arguments in favor of the gold standard is that the USA had very high rates of growth under a gold standard.  The era that’s commonly cited is the 1800’s.  The argument, in essence, is that gold is a more stable form of money that won’t lead to inflationary booms and busts.  But this isn’t always presented in a very balanced manner.  Luckily, Mark Sadowski has done the legwork for us all with a nice comment at Scott Sumner’s website.  Here’s his excellent explanation:

“First of all, it’s not at all clear that that gold has a deflationary bias (which would be a plus in Woodhill’s eyes).

The nominal price of gold fell from $850 an ounce in January 1980 to $272 an ounce in July 2000. A gold standard might have committed the US to a more inflationary monetary policy over that time period.

It’s not even clear that gold is even a good hedge against inflation over extremely long periods of time. For example gold was 0.89 English pounds an ounce in 1257. By 1999 it had risen to 172 UK pounds an ounce or an increase of just over 193 fold. But historical estimates of the Retail Price Index (RPI) by Gregory Clark have it rising from 0.144 in 1257 to 74.0 in 1999 or up by nearly 514 fold. The real value of gold went down by 62.4% over 742 years.

The real problem with a gold standard is not the deflationary bias, it’s the price volatility.

There or those who blame gold’ recent price variability on the demand for gold ETFs. But gold ETFs have only been in existence since March 2003. There’s no evidence of greater gold price variability since their introduction:

In fact gold prices appear to have had far higher variability during 1973-1983.

And annual data on internal gold demand from the UK during 1858-1914 (when the price of gold was fixed) shows extraordinary fluctuations:

Other than the supposed emergency use of fiat currency by the Spanish in a siege in 1491 during the Conquest of Granada there’s no known record of fiat currency in the West before 1661. So currency consisted almost entirely of gold or silver coins.

The historical Retail Price Index (RPI) by Gregory Clark is continuous from 1264 to present. The 396 inflation rates computed on the basis of that index from 1264 through 1660 show double digit inflation in 57 years and double digit deflation in 42 years. There are three years where prices rose by more than 30% and six years where prices declined by more than 20%. So there is little evidence of stable prices before the introduction of fiat currency.

Gregory Clark also estimates of average annual real earnings covering the same period of time. Real earnings fell in 197 years or nearly half fo the time. There are 59 years where real earnings fell by more than 10%, ten by more than 20% and one where real earnings fell by 30.8%. Through the entire 396 year period real earnings increased by 4.4% or at an average annual rate of increase of 0.011%. In short, real earnings were highly volatile but essentially stagnant prior to the introduction of fiat currency.

Goldbugs often credit the rise of the US as a world economic power to the fact the US dollar was backed by gold and silver in the 1800s.

The occupation of a lightly populated continent by a technologically superior civilation was bound to lead to some economic growth, no? But if I had to pick one reason for why the US grew from being a medium size power (it was already large enough to win its independence from one of the greatest powers on the earth) to being the world’s leading economy the last thing that would cross my mind is a silver and gold backed currency.

The United States had five major deflations during the 19th century: 1801-1802, 1814-1821, 1822-1824, 1841-1843, and 1865-1878. Four of these are associated with “panics”: the Panic of 1819, the Panic of 1837, and the Panic of 1873. The average rate of real GDP per capita growth during these five deflations was 0.6%. The average rate of real GDP per capita growth during the the 19th century as a whole was 1.4%.

Since the beginning of the 20th century the US has only had one major deflation: 1920-33. This was of course associated with the Great Depression. The average rate of real GDP per capita growth was (-1.0%) during those 13 years. Real GDP per capita growth has averaged 1.8% since the beginning of the 20th century (including the Great Depression) but has been even higher since we gave up the medieval practice of using specie as currency.

All data comes from Measuring Worth.”

I have some more general thoughts on gold here:


Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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