David Frum is on the warpath. In a National Review Online blog post, then an NPR commentary, and most recently in a National Post article, Frum has mercilessly ridiculed the gold standard. But as with most modern critiques of the "bad old days" of the laissez-faire 19th century, Frum's analysis is fraught with theoretical and historical problems.
Frum's main objection is that the gold standard is allegedly rigid, preventing the economy from smoothly adjusting to various shocks:
Since permanently abandoning gold convertibility in 1933, the US economy has experienced far less economic volatility. Recessions are fewer and shallower (if sometimes longer).
Of course, that's not the only way to balance accounts. There is another, the way Americans experienced in 1837, 1857, 1893, and 1930-33. In those years, the value of the dollar was fixed to gold. (One dollar = 1/20 of an ounce.) If something bad happened in the world or US economy, the dollar could not adjust. A recession was like a car accident without bumpers or crumple zones â€” the full pain was conveyed uncushioned to the riders in the cabin. Domestic asset values collapsed. Unemployment jumped overnight to 15% or 20%. Homes were lost, businesses disappeared.
There's a lot packed into this quote, making it hard to choose where to begin. Let's start with the claims about unemployment. First, Frum makes it appear as if 15% or even 20% unemployment was something typical under the gold standard. But no, the depression of 1893 had unemployment in the low-teens, and this downturn is generally ranked as the worst in US history except for the Great one in the 1930s.