This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

Lehrman on gold

Tyler Cowen's recent post on the resource costs of gold prompts me to write about two books on gold by Lewis Lehrman, which I have been meaning to do for some months. (See George Selgin's remarks in the comments section of Cowen's post. Also relevant is W. H. Hutt's idea decades ago in his book The Theory of Idle Resources. Apparently idle resources very often perform a function simply by waiting in readiness, as a book on your shelf does even if you have not read it yet, or even if you never read it.)

Lehrman has been a longtime advocate of the gold standard and has used his considerable wealth to help make the case through an institute that bears his name. The two books in question are The True Gold Standard (2nd edition, 2012) and Money, Gold, and History (2013). The former is a single sustained argument supplemented by a number of appendices, while the latter is a collection of old writings with some new material mixed in, arranged so as to show facets of the running argument for the gold standard that Lehrman has made for many years. The books are aimed at a broad general audience and should be read and understood in that spirit, not as if they are academic writings aimed primarily at influencing the half-dozen most highly regarded specialists in the field–although Lehrman obviously would not mind reaching them, too.

The basic argument of the two books is that (1) the Bretton Woods version of the gold standard had flaws, but (2) abandoning it was a bad mistake because what came afterwards was even more flawed, so (3) it is desirable to return not to the Bretton Woods version of the gold standard but to the more robust classical gold standard, and (4) it is feasible for the United States to do so alone or with other countries, according to (5) a proposed course of action that Lehrman offers.

If you have read a number of my posts you probably already have a sense of what I am going to say, so I will be brief.

Virtues: The books are clearly written and well suited for their intended audience. The distinction between the classical gold standard, in which the major economies all relied on their own gold stocks for reserves, and the interwar and Bretton Woods systems, which were gold exchange standards, is crucial, and Lehrman stresses it. A gold exchange standard is more fragile than a gold standard in the sense that if the gold-standard country one is linked to abandons gold or devalues, a gold exchange standard country faces more pressure to do likewise than it does if it hold its own gold reserves, which have retained value. Lehrman reviews how gold did not impede some of the most vigorous growth the U.S. economy ever had, in the 19th century. He answers a lot of the questions people would have about the specifics of returning to a gold standard. In The True Gold Standard, he offers a nod to free banking as an eventual possibility (page 104). He also repeatedly stresses that the analysis is a question of comparing realistic, historically tested systems, and choosing a "least imperfect" system, not pretending that either a gold standard or fiat money is a perfect system.

Shortcomings, from my perspective: Lehrman criticizes the gold exchange standard and proposes to eliminate it by international agreement, but I don't see it happening under central banking. The gold exchange standard in the form that Lehrman (and I) think is fragile arose because some central banks wanted to earn greater returns on their assets by substituting foreign interest-earning assets for gold. They accepted greater returns in exchange for greater risk to their assets. The same tradeoff would exist in a restored international gold standard.

Second, you know my view that a durable gold standard is not compatible with modern central banking. Modern central banks exist to practice discretion in monetary policy. Some have inflation targets as guidelines, but not as strict rules that they must always adhere to.  A strict gold standard of the kind Lehrman advocates conflicts with the spirit and practice of modern central banking. Under the classical gold standard, half the world did not have central banking, and in the half that did, the central banks were often privately owned, giving them greater autonomy from the state than later, government-owned central banks have typically had. I think that only a free banking system or possibly a currency board system will produce a durable gold standard under today's conditions of political economy.

Lehrman's proposal is specific to the United States. If a much smaller economy were to adopt a gold standard alone, it would not be sufficient to convert gold from its present role of predominantly a speculative commodity to the more mundane role of a unit of account with much smaller variations in purchasing power. But where might the tipping point be in terms of GDP of gold standard countries as a share of global GDP (if that is a good measure to use)? I would like to see Lehrman or somebody in his circle address the issue, even if the answer is necessarily imprecise.

So, as I wrote in an earlier post, let's have the debate on gold. We know that gold has flaws. After the global financial turmoil and then outright crisis of 2007-09, though, it is astounding to me that many of the people who are highly critical of a gold standard act as if the crisis had nothing to do with monetary policy and that the case for fiat money is as strong as it looked in the placid half-decade before the crisis.