It is a popular myth—not just among historians but even many economists—that the gold standard caused, or at least exacerbated, the Great Depression. Yet despite the popularity of this view, it doesn’t hold up to the simplest of scrutiny. Elsewhere I have given a detailed response to the allegations against gold, but in the present post I’ll keep things accessible to the layperson by looking simply at one chart and one table. When we’re done, I hope the reader will agree I’ve made a convincing case that the gold standard was not to blame for the greatest economic calamity in modern history.
Industrial Recovery: Prosecution Exhibit A
Among economists who want to indict gold, the following chart (which originated with Brad DeLong, who in turn had adapted it from the 1992 work of Barry Eichengreen) seems to be a slam dunk for their case:
The bold portions of the lines show when each country (ostensibly) abandoned its currency’s peg to gold, giving its government the freedom (in DeLong’s telling) to run big deficits and implement a New Deal. DeLong thinks it’s obvious from the chart that stubbornly clinging to gold was tying the hands of policymakers, and condemning one’s economy to stagnation.
As I said in the introduction to this post, I am not here to get into abstruse economic theory; you can check out this lecture I gave to economics students if you want to see me referee the disputes among schools of thought on the Great Depression. For our purposes here, let me make a simple observation about the above chart: Even on its own terms, it shows quite plainly that four years after the US had left the gold standard, industrial production still hadn’t recovered to its 1929 level.
This is astounding, because in all previous US history—from the Coinage Act of 1792 up until the stock market crash of 1929—the US dollar had been defined as a certain weight of gold (and silver too, in the beginning), and yet there had never been a depression/panic where industrial output took eight years to recover its prior peak. In other words, the longest slump in industrial output in US history occurred the one time the authorities responded to the crisis by abandoning gold. On the face of it, that seems like an odd outcome to lay at the feet of the gold standard.
The Unemployment Figures Exonerate Gold
But we can make the case to acquit gold even simpler by showing the unemployment figures for both the US and UK during the Great Depression:
To repeat: Historically, during the heyday of the classical gold standard, advanced economies like the US and UK would experience financial panics and/or depressions (with a small “d”). They could be quite severe, but they were typically short: the economy would quickly reach rock bottom, with wages and prices both falling, and then a robust recovery would ensue.
Nothing like this happened in the 1930s. As the table above shows, even seven years after leaving gold, the US and UK still had double-digit unemployment. Even during this period alone, when both countries were off of gold, this would have constituted an agonizingly long depression and awful labor market. And to repeat, since we saw nothing like this in earlier episodes when the authorities didn’t abandon gold, it is absurd to argue—as DeLong did in his congressional testimony featuring the chart we showed above—that the problem in the 1930s was that governments stubbornly clung to their gold pegs, thus delaying the “medicine” of their New Deals.
As I asked in my book on the subject: What would the data have to look like for economists like DeLong to admit that the New Deal had prolonged the Depression?
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together the dependability of Whole Life insurance policies with the benefits of blockchain-based finance.
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