Wells Fargo moving gold, Deadwood, S.D., 1890 (Photo by Heritage Art/Heritage Images via Getty Images)
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Go back on a gold standard? That’s crazy. This standard call-and-response prompts a question. Have we gone back on a gold standard before, and if so successfully? Yes indeed. If going back on gold has happened and has worked, we should both know about it and wish to call on the precedent today.
In 1879, the United States returned to the gold standard, having cashiered it (as well as redemption in silver) in 1861. Things went so well that the transition from the 1870s to the 1880s remains the greatest era of economic growth in the nation’s history. The whole generation after 1865 was incredible. New business after new business, greater opportunities for work and reward, incredible new products—all cascaded over the land in these years, as the United States committed itself to returning to the gold standard and in fact did so.
When the Treasury opened the gold window at New Year’s 1879, nobody showed up. As long as currency and bank deposits were redeemable in gold, people were happy to use those other media to get at it in the American economy. And did they ever—as the commitment to gold became hard and fast. What a lesson from our economic history, and we forget it today.
Here is how the government prepared for the return to gold: it cut tax rates, cut spending, and largely swept away the state. The income tax imposed after 1861? Gone in the early 1870s. The huge level of government spending goosed with the civil war? Also collapsed by the 1870s. A tariff was big, but as the only federal tax prior to 1861, it was only collecting a teensy share of national output in revenue. The economy with a gold and silver-defined money was off to the races before 1861, and then was again after 1865.
Here is the formula—hat tip to Nathan Lewis for that formulation—to go back on gold, cut tax rates or better yet eliminate tax domains. The demand for the currency will be huge, and demand for the definitional asset (gold) will fall. Going back on gold will assure users of the currency that it is good, reduced tax rates will cause people to want to use currency productively, and people will demand it, for these powerful twin reasons, all the more.
Formula: Cut tax rates even to zero, go back on gold, have an incredible economy, and for the long term. We go over these glorious associations in our history in our new book Free Money; Bitcoin and the American Monetary Tradition.
Second example: in the 1920s, the United States went back on gold, but in the 1930s the whole thing blew up into the Great Depression. What gives? Briefly in World War I, the United States—as Britain and others did for longer—went off gold, as it jacked up tax rates, indeed past 70 percent on income. Demand for currency plummeted. Inflation took off—the price level doubled.
The United States returned to gold quickly enough as it cut tax rates. The top tax rate went from 77 to 25 percent, as the currency reconnected to gold, and everybody demanded the currency like wild once again. Economic growth was legendary. It was the roaring 1920s. The federal budget was in surplus every year of the 1920s—as the government cut tax rates and had the largest debt ever, owing to World War I.
Formula once again: when going back on gold, cut tax rates most seriously. All the world will want your money, and your economy will be a peach. What is this about going back on gold can’t be done, is crazy, cannot work? What of these enormous episodes to the contrary in our history? The twenties threw everything at the gold standard—high tax rates, huge debt, and cutting tax rates and going off gold worked perfectly.
The 1930s; yes. In 1930, the United States jacked up its tariff rates, watched the duty revenue dry up, and then panicked and raised the top income tax rate by one-and-a-half fold, from 25 to 63 percent. Everybody piled out of currency and into gold. Instead of reversing course and cutting tax rates, the president (FDR) outlawed gold. Lesson not learned. Cut tax rates to get on or keep a gold standard; do not eliminate gold ownership. We got a Depression through the early 1940s for these efforts, for having high tax rates and demonetizing gold.
Is it not so curious that massive episodes in this nation’s economic history show rather indisputably that going back on a gold standard sure can be done? We went off gold for good in 1971. Can’t go back on it today—deficit too big, maybe? All that is in the past, all these precedents. Of course we can go back on the gold standard, as we cut tax rates. And can you imagine how great the economy will be.