Rejoinder to David Frum on the Gold Standard


David Frum — former Bush speechwriter, ambitious author, American Public Radio commentator, and all-around guru — has been lecturing Ron Paul supporters about the gold standard. After three such lectures (a National Review Online blog post, an NPR commentary, and finally a National Post article) I decided to throw my hat in the ring and defend the gold standard in this article. Frum responded in a quite confident blog post, unfazed by my arguments and in fact further convinced that he is surrounded by friggin idiots. In the present article I’ll try one last shot at defending the gold bugs.


At the risk of sounding wussy, I would first of all encourage Mr. Frum — as well as anyone else who thinks the gold standard is patently absurd and obsolete — to drop the smug armor and actually entertain, if only for the sake of argument, that supporters of the gold standard might actually have some valid points.

In the articles linked above, Frum has written the following diplomatic gems:

  • "[The gold standard] can never be restored, even if anyone were foolish enough to try…"
  • "Huckabee [on the Fair Tax] and Paul [on gold] have not the faintest idea of what they are talking about. The problem is not that their answers are wrong — that can happen to anyone. The problem is that they don’t understand the questions, and are too lazy or too arrogant to learn."
  • "My correspondents give no sign of understanding this [problem with the gold standard], or very many other of the fundamental challenges of monetary economics. Many of them seem unaware that these challenges even exist. I am honored, I suppose, that so many of them seem to think it worth their while to write me. But really their time would be better spent doing some [basic] reading. And here’s a hint: Reading is of very little value if you only read what you are already inclined to agree with. Like any muscle, the mind only grows when it encounters resistance."

I believe the only proper response to the above is a succinct: I know you are, but what am I? — times infinity. (I had been inclined to boast that my dad made more money than Frum’s father, but his Wikipedia entry made me hesitate.)


It really never ceases to amaze me when self-described conservative Republicans can champion FDR, even on matters of economic policy. And yet that is exactly what Frum has done, time and again. We are to believe that the person who gave us the New Deal and took the country to the brink of outright central planning, also did us a great economic favor by ordering American citizens to turn in their gold at gunpoint. Remember folks, the depository at Fort Knox was built in the 1930s in order to store all the gold that FDR judiciously removed from the American people.

The other great moment in monetary history occurred when Richard Nixon declared in 1971 that the US would no longer honor its backing of the greenback, even with other governments. At this point the US dollar was a true fiat currency, backed up by nothing except the public’s expectations of its future purchasing power. We’ll get into the direct analysis of these issues in a moment, but here I just want to remind readers that Nixon also instituted peacetime wage and price controls, and famously declared, "We’re all Keynesians now."

Of course this is just circumstantial evidence, but maybe the fan of the free market should stop and pause before endorsing Frum’s version of history.


Perhaps the single biggest mistake Frum makes is his argument that the gold standard is akin to government intervention, whereas nowadays the dollar is "free" to float. To the free marketeer who doesn’t like price controls, this is a strong argument. After all, why should the government fix the price of gold at $35 an ounce (or whatever), if it doesn’t fix the price of Cadillacs or TVs?

The confusion is summed up in the following quote from Frum:

And in order to sustain their argument, they engage in what can only be called sleight of hand. My correspondent Mr. Murphy for example wants to claim the high growth and low inflation of the period 1955-1965 as a triumph for the gold standard! Yet in those years it was [seriously] illegal for US citizens to own monetary gold. The dollar was less freely convertible into gold in the Bretton Woods years than it is today — when any dollar holder can buy all the gold he or she can afford. [Italics in original.]

First, the reason I had picked 1955-1965 (and compared it to 1975-1985) was to test the claim that the gold standard leads to macroeconomic instability. I found that real GDP growth was both higher and (very slightly) less volatile in the first period, even though at that point the US was still on the gold-exchange standard of Bretton Woods. It’s true, I don’t particularly like the Bretton Woods system, but I thought it was a bit unfair to compare modern economies with those in the 19th century. After all, there have been plenty of innovations in financial markets (e.g. more developed futures markets and option contracts) that would smooth out economic fluctuations.

In any event, there is one crucial respect in which the dollar is not convertible into gold today, and if Frum really doesn’t see why this issue is important, then it’s no wonder he finds the gold standard ridiculous. During 1955—1965 (and all of the Bretton Woods period), the US government was obligated to surrender an ounce of gold bullion to other central banks in exchange for thirty-five US dollars. A major outcome of Bretton Woods was to establish the USD as the world currency, and other countries needed some assurance — i.e. a peg to gold — before trusting the Federal Reserve with such power.

Fundamentally, the gold standard is a constraint on the government. It puts a severe limit on the increase in the supply of US dollars, when foreign banks (and better yet, when any private citizen) can turn in those green pieces of paper in exchange for a specified amount of actual gold. This is not at all analogous to the government "fixing" minimum wages or maximum apartment rents. It is rather a pledge on the part of the government to always trade a specified amount of gold for US dollars.

This pledge doesn’t per se restrict anybody else; people are free to buy and sell gold at other prices — it would just be silly to do so, from either the seller or buyer’s point of view. By the same token, under the classical gold standard the participating nations all had "fixed" exchange rates between their currencies. Again, this wasn’t a reflection of a modern-day price control, the way some tinpot dictatorship might impose restrictions on the foreign exchange market. Rather, the fixed exchange rates merely reflected the fact that the governments pledged to redeem their own currencies in specific weights of gold, and hence arbitrage ensured that the currencies themselves traded in specific ratios.

Of course, Frum is right that there were significant restrictions on private citizens during Bretton Woods. Effectively, what happened is that the major governments abandoned gold convertibility before or during World War II, and then decided to try to have the best of both worlds — price stability with flexible "monetary policy" — when they hammered out the agreement for a post-War system. To put it somewhat simplistically, they formed a cartel, where the billions of their citizens were prevented from exercising any restraint on their decisions to inflate their currencies, but they did at least retain the power to check each other. And then, in 1971, Richard Nixon decided that this too was too onerous, and so abandoned even this last obstacle to massive inflation.

The results speak for themselves. Here is a chart of annual percentage growth in the US consumer price index. Remember the key dates of 1933 and 1971, when FDR killed the classical gold standard and then when Nixon killed the gold exchange standard. Look at what happened to US inflation rates in the years following those decisions:


Frum continually writes that there are "three fundamental things we want a money to do." I’m not sure where he derived these criteria, but here they are:

  1. "We want money to maintain a stable domestic price level.
  2. We want money to maintain a stable relationship against other currencies.
  3. We want money to be freely convertible into goods, including other moneys."

Frum goes on to say that it is impossible for any money to satisfy all three objectives. According to Frum, the modern fiat system achieves (1) and (3), yet not (2). In contrast, the classical gold standard achieved (2) and (3), but not (1). So therefore, according to Frum, proponents of gold must explain why maintaining a stable relationship against other currencies is more important than maintaining domestic price stability.

At this point, let me confess to readers that I had to go back and triple-check Frum’s blog post to make sure I had his argument correct. But the above really is what he’s claiming. In his framework, the advantage of the classical gold standard was that it eliminated pesky movements in the dollar/pound exchange rate, while the downside was that US citizens couldn’t be confident in what their dollar would purchase in the future.

Again, let me reiterate that I’m not sure where Frum got these criteria from; some people have suggested that he and I are coming from completely different viewpoints. I am analyzing this as an economist, whereas he (perhaps) is thinking in terms of geopolitics. I don’t know; maybe it’s awkward for the US president to negotiate with European rulers when the dollar plummets. But in terms of economics, it’s far more important for prices to be accurate than to be "stable." If one country is on a gold standard while others are not, its currency will certainly appreciate year after year against theirs, as it should.

As far as the claim that domestic prices were unstable during the classical gold era: Frum is overlooking the massive inflations following the two decisions to sever the dollar from gold. Yes, "[s]ince 1982, the Fed has done a better and better job" — but the Fed didn’t do such a hot job during the 1970s.

Another issue is that the allegedly terrible deflations under the classical gold standard were exacerbated by federal and state intervention into the banking sector. Without the booms and busts caused by manipulation of interest rates, the classical gold standard yielded a gentle fall in prices over time. Nobody seems to worry about this gradual rise in purchasing power when it comes to the modern computer industry. Why would it be so terrible if applicable to most goods and services, especially in a predictable manner?


It seems that part of Frum’s rejection of the gold standard is that the supply of money would be inflexible. In contrast, under our modern fiat regime, Frum tells us that, "The Federal Reserve tries to emit enough money to meet the needs of the US and global economies, with minimal inflation."

This is a popular misconception. So long as prices are flexible, any amount of money can "do the job." If the output of other goods and services grows more quickly than the stock of mined gold, then prices can simply fall over time. This is no more exotic than the fact that people are now used to constant inflation. The major differences are that (1) under deflation, purchasing power constantly rises and (2) the volatility of the change has a natural limit under the gold standard, since it’s a lot more difficult to mine gold than it is to create additional fiat money.

Finally, for those who really want to explore the topic, I should mention that many free market economists also share Frum’s worry over the inflexibility of the stock of gold money. Yet — being fans of the free market — their conclusion isn’t to endorse central planning the way Frum does. Rather, they advocate privately-run fractional reserve banking (pdf), or some even advocate private issuance of fiat currency. Modern Austro-libertarian economists have heated arguments over these ideas, but they all agree that giving governments control over the money supply is probably a BAD idea.


I don’t see it among his three objectives, but another feature of an ideal monetary system is one in which central bankers can’t create a housing bubble, or in which Wall Street traders don’t spend most of their waking hours trying to parse the latest hiccup from the Fed chairman. Money is the single most important good in the market economy. Why in the world would we entrust it to politicians?

One last point: Frum’s analysis focuses on the US experience. But look at what happened in other countries with fiat money. I haven’t read his work too closely, but I’m going to go out on a limb and suppose that Frum is a big opponent of the Nazi regime. In that case, he might be interested to know that some economists would argue that were it not for the massive hyperinflation of the Weimar Republic, Adolf Hitler would never have been elected. Where does that fit into the list of objectives?