There were no worldwide financial crises of major magnitude during the Bretton Woods era from 1947 to 1971. Lesson: Gold is a more efficient governor of monetary policy that the Federal Reserve.
When it last met, the Federal Open Market Committee (FOMC) signaled its desire to increase the rate of inflation by providing additional monetary stimulus. This policy is based on a false-and dangerous-premise: that manipulating the dollar’s buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.
From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable-the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.
What’s happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.
Interest rates, too, have been high and highly volatile, with the yield on triple-A corporate bonds averaging more than 8% and, until 2003, never falling below 6%. High and highly volatile interest rates are symptomatic of the monetary uncertainty that has reduced the economy’s ability to recover from external shocks and led directly to one financial crisis after another. During these four decades of discretionary monetary policies, the world suffered no fewer than 10 major financial crises, beginning with the oil crisis of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis and potential currency war of 2010. There were no world-wide financial crises of similar magnitude between 1947 and 1971.
At the center of each of these crises were gyrating currency values-either on foreign-exchange markets or in terms of real goods and services. As the dollar’s value gyrates it produces windfall profits and losses, feeding speculation and poor judgment. The housing bubble was fed in part by 40 years of experience with a dollar that lost purchasing power every year. Today, individual investors are piling into gold and other commodities in hopes of finding a safe haven from the FOMC’s intention to decrease the buying power of the dollar and reduce the value of our savings.
And what of the seductive promise that a floating dollar would make American labor more competitive and improve the nation’s trade balance? In 1967, one dollar could buy the equivalent of approximately 2.4 euros (based on the pre-euro German mark) and 362 yen. Over the succeeding 42 years, the dollar has been devalued by 72% against the euro and 75% against the yen. Yet net exports have fallen from a modest surplus in 1967 to a $390 billion deficit equivalent to 2.7% of GDP today.
The members of the FOMC, like their predecessors, are trying to do the best they can, but they are not really sure what it is that needs to be done. They have kept the federal-funds rate near zero for almost two years, but small businesses find it difficult to get loans and savers suffer from the lost income brought by artificially low interest rates. Now they’re about to advocate higher inflation-i.e., less price stability-in hopes of spurring economic growth.
Economists and pundits may disagree on why the gold standard delivered such superior results compared to the recurrent crises, instability and overall inferior economic performance delivered by the current system. But the data are clear: A gold-based system delivers higher employment and more price stability. The time has come to begin the serious work of building a 21st-century gold standard for the benefit of American workers, investors and businesses.
Charles W. Kadlek,
for Markets and Money
Editor’s Notes: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty.