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Recently, Ralph Benko began
to dig at the question: Is a gold standard system bad for the
middle class?
First: the obvious. The U.S. middle class reached its peak of
prosperity at the end of the 1960s. The typical one-income family
could afford a house, car, decent healthcare and a college
education, and still have enough left to maintain a 10% savings
rate.
Yes, they had vacuum-tube television sets in those days, instead of
watching TV on their telephones. But, as most anyone who was an
adult at that time will attest, things were generally better. Former
president Jimmy Carter said
recently that, “the middle class has become more like poor
people than they were 30 years ago. So, I don’t think it is getting
any better.” (I think he means more like forty-five years ago.)
The United States had a gold standard policy from 1789 to 1971. At
the end of that 182-year period, the U.S. middle class was the
broadest and wealthiest in the history of the United States, and
indeed the world.
If a gold standard system is bad for the middle class, then how is
it that, after nearly two centuries of a gold standard policy, the
middle class was the best-off it has ever been?
For some reason, people never think of these things.
Benko responded to some comments by Charles Postel, author of The
Populist Vision, accusing a gold standard system of being a tool for
rich bankers, at the expense of the middle class.
This is an accusation that dates at least as far back as the 1890s,
when the Democratic Party wanted to devalue the dollar by
approximately 50%, via “free coinage of silver.” (It was sort of
like the “platinum coin” argument of today.) Democrats apparently
wanted to relieve farmers who were momentarily caught in a situation
of heavy debts and sinking commodity prices.
The 1896 presidential election became a referendum on “free coinage
of silver” (devaluation). The voters (most all of them working
class) chose
the Republican candidate William McKinley, who promised to
keep the dollar “as good as gold.”
Did the voters make the right choice? The next seventy-five years of
U.S. history tells the answer. In 1896, per-capita GDP in terms of
ounces of gold was 10.63 ounces. At the $20.67/ounce gold parity of
the time, it was the same as $219.74.
In other words, per-capita GDP was equivalent to about eleven $20
“double eagle” gold coins, as they were minted in 1896, and formed a
regular part of the currency system. Each had a little less than an
ounce of gold.
In 1970, just before the U.S. left the gold standard and devalued
the dollar beginning in 1971, the U.S. per-capita GDP was 146 ounces
of gold — the highest this measure has ever reached. It was
equivalent to 151 $20 gold coins, as minted in 1896.
The per-capita GDP of the U.S. citizen increased by fourteen times
over that 75-year period — as measured in “1896 dollars.”
Was that good for the “working class”?
Is 151 > 11?
It must be a difficult question, because even sophisticated
academics can’t seem to figure it out.
The Stable Money vs. Funny Money debate has been going on for
centuries, indeed millennia. The Greek philosopher Plato and his
student Aristotle disagreed over this point.
Since then, we have had many, many experiments with both options.
What we find is that the world’s greatest success stories are
universally based on Stable Money — in practice, a gold- (or, in the
past, silver-) based system.
Aristotle’s student Alexander of Macedonia conquered the known
world, and unified it under a silver-based monetary system according
to Aristotle’s principles. Plato apparently tried to put his
funny-money ideas into use in the state of Syracuse in 387 B.C. It
went so badly that, historians say, the king of Syracuse sent Plato
to be sold at the slave market in Corinth.
Rome’s height of glory, under Octavian, was also the time when Rome
used reliable gold and silver-based money.
In the sixteenth century, the Bank of Genoa’s gold-based bonds
traded at a 3% yield and infinite maturity, for nearly a hundred
years, forming the commercial basis of Italian prosperity during the
Late Renaissance.
In the seventeenth century, the Bank of Amsterdam’s reliable
gold-based guilder enabled Holland to become the wealthiest country
in Europe, with an empire that spanned the globe.
After Britain dropped its funny-money policy at the beginning of the
18th century, it soon replicated the Dutch miracle on a larger
scale. Britain became the birthplace of the Industrial Revolution,
and its empire soon eclipsed Holland’s.
Thus, it should be no surprise that the United States, the most
successful country of the 19th and 20th centuries, also had a Stable
Money policy during that time.
Today, Funny Money remains ascendant in U.S. politics, as it has
since 1971. In time, the age-old lessons will be learned again. But,
perhaps, not by us — the U.S. (perhaps known by then as the “FUS”)
may serve as a cautionary example for others elsewhere.
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