Libertarian Gold Standard Myths Never Die

Updated: I have added an average for 1870 to 1913 calculated from Romer (1989)

Proof in the video debate below on gold, which involves Peter Schiff and Rick Rule (pro-gold) versus Marshall Auerback and Cullen Roche (anti-gold).



But it is Peter Schiff’s comments here in the video clip below that represent a libertarian/Austrian economics myth that will not die.



Peter Schiff says this:

“Look at the period between the end of the Civil War and the beginning of the First World War. That economic growth rate is unmatched at any point in US economic history.”

The Austrian school economist Jesús Huerta de Soto recently put his foot in his mouth and made a very similar but utterly wrong comment which I refute here.

What about Schiff’s comments? According to Schiff, the period between 1866 and 1914 had an “economic growth rate” that is “unmatched at any point in US economic history.”

Of course, by “economic growth rate” he could mean either of the following:

(1) real GDP growth rate, or

(2) real per capita GDP growth rate.

So what is the evidence?

The standard source for both modern real GDP and real per capita GDP growth rates in virtually every nation is Angus Maddison’s The World Economy: Historical Statistics (Paris, 2003).

I have crunched the numbers on both real US GDP and per capita GDP growth rates (here and here).

First, let us start with real US GDP. Because of an anomaly in Maddison’s data (as described here), it is best to give estimates from both Maddison’s and Balke and Gordon’s data. For real GDP averages below, I have also given an average calculated from Romer (1989) (the data can be seen here), even though Romer’s estimates are now generally regarded as inferior to those of Balke and Gordon.

Unfortunately, annual estimates of GDP from 1866 to 1868 are not available, but we do have annual estimates for 1870 to 1914. Since the US suffered a recession in 1914 after the First World War started, I will remove this year from my estimates to make things better for advocates of the gold standard.

If we select those periods of economic and historical significance in US history, including the 1870 to 1913 period, and rank them from the highest to the lowest in terms of growth, we get the following average annual GDP figures:

(1) World War II average annual growth rate: 12.491%
(2) Recovery from Depression: 1934–1940: 6.511%
(3) Roaring ’20s 1922–1929: 4.856%
(4) Average annual real GDP rate 1983–1989 (Reagan boom): 4.282%
(5) Average annual real GDP rate 1950–1973: 4.160%
(6) Average real GNP growth rate, 1870–1913 (Balke and Gordon): 4.06%
(7) Average real GNP growth rate, 1870–1913 (Romer): 4.05%
(8) Average annual real GDP rate 1871–1913 (Maddison): 4.034%
(9) Average annual real GDP rate 1948–1973: 4.000%
(10) Average annual real GDP rate 1873–1896 (Maddison): 3.666%
(11) Average annual real GNP growth rate, 1873–1896 (Balke and Gordon): 3.596%
(12) Average annual real GDP rate 1974–2001: 2.963%.

As we can see, the 1870–1913 or 1871–1913 period was not “unmatched at any point in US economic history” in terms of economic growth. The largest GDP growth happened in America’s moderate command economy in World War II.

Even putting wars aside, it was the recovery from the Great Depression from 1934–1940 under Roosevelt that had the highest average GDP growth rate at 6.511%. Next comes the Roaring ’20s (if we calculate this as 1922–1929) then the Reagan boom (1983–1989), and then the Golden Age of Capitalism if we reckon this as the 1950–1973 period.

Only then does the 1870 to 1913 period occur in the ranking, and no matter what data you use.

Schiff’s comments are clearly falsified by our best data, at least with reference to real GDP.

But of course here an objection can be made: isn’t real per capita GDP a better way to measure real wealth in a nation, if we wish to gauge how wealth was increasing in relation to the population (that is, per capita or by head)?

Yes, though one should also look at distribution of wealth issues too. But I will put aside the inequality and distribution of wealth issues to make it easier for the libertarians.

Is the real per capita GDP data any better for the Austrians? No, it is worse.

The full data can be seen here.

Again, we can take those periods of economic and historical significance in US history, including the 1870 to 1913 period, and rank them from the highest to the lowest, and get the following average annual real per capita GDP figures:

(1) World War II average per capita growth rate: 11.204%
(2) Recovery from Depression, average real per capita GDP growth rate 1934–1940: 5.75%
(3) Average real per capita GDP growth rate, Roaring ’20s 1922–1929: 3.35%
(4) Average real per capita GDP rate 1983–1989 (Reagan boom): 3.338%
(5) Average real per capita GDP growth rate 1950–1973: 2.66%
(6) Average real per capita GDP growth rate 1948–1973: 2.30%
(7) Average real per capita GDP growth rate 1974–2001: 1.88%
(8) Average real per capita GDP growth rate 1871–1914: 1.63%
(9) Average real per capita GDP growth rate 1873 to 1896: 1.42%

Admittedly, one should discount the WWII period, since the output of this period included mostly war production, not consumer goods.

But even with the war discounted, the highest period of real per capita GDP growth was still the recovery from depression from 1934–1940, with an average real per capita GDP growth rate of 5.75%.

Next comes the Roaring ’20s, the Reagan boom, the Golden Age of Capitalism (whether reckoned either as 1950–1973 or 1948–1973), and the neoliberal era (1974 to 2001).

The gold standard era from 1871 to 1914 comes second last in the list, and is followed by the 1873 to 1896 deflationary period, which was the worst of all periods.

Could the data be any clearer?

Remember the comment by Peter Schiff:

“Look at the period between the end of the Civil War and the beginning of the First World War. That economic growth rate is unmatched at any point in US economic history.”

The data that we have show us clearly that this is false. It is a libertarian/Austrian myth.

What was that about if you repeat a lie enough times people will start to believe it?

BIBLIOGRAPHY
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.