Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 4

Gerry Jackson

It Professor Mitchell’s real objection to a gold standard is that it puts a leash on government meddling with respect to monetary policy, meaning that politicians could not apply those so-called flexible monetary policies that nearly 220 years ago Walter Boyd aptly called “quack medicine”1. To the classical economists this was a powerful argument in favour of a gold standard, believing as they did that the “self-acting”2 mechanism of the gold standard was infinitely superior to monetary policies made by opportunistic politicians driven by a desire to obtain short-term electoral advantages. But more than anything else, they probably feared that in their ignorance politicians would fall prey to those economic fallacies that Walter Boyd warned against. Now Professor Mitchell is certainly entitled to question the classical view of the gold standard and its adoption. In doing so, however, it is incumbent upon him to get his facts straight and so avoid misleading his readers. He states:

Under what was called a gold specie standard (sometimes called a 100 per cent reserve gold standard) the central bank was required to hold gold in proportion to the currency it issued (the proportion being the gold currency exchange rate). (Return to a gold standard – don’t even think about it ).

But it was not until 1844 that the Bank of England was required by law to implement, with the exception of the fiduciary media3, what was called the currency principle, a policy that ensured not just full convertibility at the mint price but that the note issue would move in the same direction and to the same extent as any changes in the Bank’s stock of gold. (It needs to be noted that currency was defined as bank notes and coins.)

Everyone at the time who was acquainted with the subject fully understood that there was no 100 per cent gold reserve. From 1720 to 1797 the Bank of England’s note issue only came close to matching its gold stock in 1739 and 1741. It was clear that during the eighteenth century the Bank’s directors were not adhering to any monetary policy or rule. Unfortunately, this situation continued into the nineteenth century causing Lord Overstone, a hard money man and leader of the currency school, to comment:

…that the management of the circulation during the period of suspension was not regulated by reference to any definite and established principle.4

Professor Mitchell made four charges against the gold standard, all of which are false.

  • The gold standard didn’t produce lower price variability.
  • It didn’t lower inflation rates.
  • It didn’t prevent bank crises and financial panics.
  • It was abandoned because it was politically unsustainable such was the entrenched unemployment that accompanied it.

The first one is rather silly because no classical economist ever argued that the gold standard would produce stable prices. (In fact, price stabilisation policies are incompatible with a gold standard.) As stated earlier, they favoured the gold standard because it was a “self-acting” (automatic mechanism) that kept foreign exchange rates within the specie points thereby maintaining equilibrium between the relative purchasing power of internationally traded goods. This is why, as Joseph Schumpeter5 put it, “the ‘classic’ writers without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard”. It’s also why Ricardo believed that under certain circumstances a tariff was justified, regardless of what today’s economic commentariat claims.

To support his accusation Professor Mitchell produced a chart  giving the annual price of gold from 1850 to 2006. Instead of confirming his argument the chart actually refuted it. With respect to the gold standard proper the price of gold should be taken from 1717 to 1914. During that period one will find that the price of gold was virtually constant. (Its nominal price, not its purchasing power).  The only time it moved significantly was when gold payments were suspended during the period 1797 to 1819. For example, while the mint price remained at £3 17s. 10½d the gold price was £5 10s in 1813, £5 5s the following year and £4 2s in 1819. (The last figure misled Ricardo into thinking that a 5 per cent deflation would be sufficient to restore the mint price of gold.)

The question of prices in the nineteenth century and how classical economists viewed them is an important one. In 1832 Charles Babbage6 published an interesting book containing numerous tables detailing the remarkable productivity-induced fall in prices that had occurred during the previous 20 years among a large range of basic goods.  George Warde Norman wrote in 18387 about the fall in prices brought about by “a diminution in the cost of production, arising from improved machinery…” While writing on wages in 1834 Colonel Robert Torrens made the same point about real wages, prices and productivity as did Nassau Senior8. These writers were all prominent members of London’s famous Political Economy Club.

So it is quite clear that nineteenth century economists welcomed a productivity-induced fall in the prices because they understood (unlike the great majority of today’s economists) that it would raise the real demand for labour and hence real wages for the labour force, unlike a monetary-induced fall in prices (deflation) which would drive an economy into a depression and create large-scale unemployment. Therefore, any suggestion that the classical economists believed that a gold standard would produce stable prices is erroneous. Professor Mitchell’s second charge that the gold standard “didn’t  lower inflation rates” is equally silly. The Nineteenth century was noted for falling prices. The late David Landes, a noted professor of economics and history who taught at Harvard, stated:

In sum, the nineteenth century was marked by a protracted and sharp deflation stretching from 1817 to 1896 and with only one short interruption of some six or seven years9.

Confusing a productivity-induced price fall with deflation (a monetary-induced price fall) is an appalling error that nearly every economist, economic historian and economic commentator now makes, proving that in some ways the classical school are still by far  the better economists. Nevertheless, the quote reveals what every student of nineteenth century economic history always knew about nineteenth prices.

His third charge that the gold standard “didn’t prevent bank crises and financial panics” is perfectly true. However, not a single classical supporter of the gold standard ever said that it would because of the convertibility question. How Professor Mitchell came to believe otherwise leaves me mystified. But this raises a very important question regarding gold, capitalism and the ‘boom-bust cycle’.

Peter Jonson10 (aka Henry Thornton) wrote “that the main point that needs emphasis is that periodic crises are a feature of the capitalist system”.  Well, the real Henry Thornton who published his book in 1802 disagreed with him, leading me to suspect that Mr Jonson never read the book. The same goes for Professor Mitchell who also refers to Henry Thornton while neglecting to mention the man’s theory of booms and busts11. Peter Smith thinks that booms and busts are not only inherent to the capitalist economies but “indispensable”12. I could say the same thing about crime and society and I would be just as wrong.

Steve Kates teaches at RMIT and not only believes that the trade cycle is natural to capitalism but that the classical theory of the phenomenon was formed in the early 1820s. He also bizarrely believes that the “Austrian theory had been designed to refute Marxists”13. He is wrong on both counts. With respect to the ‘classical theory’ I assume he is referring to Colonel Torrens’ An Essay on the Production of Wealth 182114. He seems to have missed the fact that some years later Torrens completely abandoned his theory15 in favour of Henry Thornton’s theory, the one Steve Kates seems to think does not exist. Moreover, the theory was swiftly taken on board by Ricardo and became the currency school’s explanation for what were then called “revulsions” and which culminated in Peel’s 1844 Bank Act. (There will be much more on this topic at a later date. As for  Professor Mitchell’s fourth charge it really applies to the post-WWI period, which I shall deal with after I publish my trade cycle articles.)

Finally, I believe that at this stage it is necessary for me to stress that I have not singled out Professor Mitchell for treatment with respect to the gold standard. Our right-wing economists are not any better. Some years ago Alan Wood16, then economics editor of The Australian, accused the gold standard of having caused “economic and social dislocation”. This is complete nonsense and revealed an appalling ignorance of how the gold standard operated.  Not so long-ago Professor Sinclair Davidson17 dismissed the gold standard as one of those bad ideas “[that] just never die” without explaining why. He even claimed, without a shred of evidence, that the return to gold by Australia in 1925 retarded economic growth. I prefer explanations based on fact to baseless assertions, particularly with respect to economics.

Grossly misleading claims about the gold standard happen far too often. At least Professor Mitchell made a serious and detailed attack on the gold standard rather than do the lazy thing and dismiss it out of hand as did our right-wing economists. For that he deserves to be thanked.

Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 1

Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 2

Professor Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 3


1Boyd, Boyd, A Letter to the Right Honourable William Pitt, on the Influence of the Stoppage of Issues in Specie at the Bank of England, Printed for J. Wright and J. Mawman, 1801, p. 58.

2Norman, George Warde, Letter to Charles Wood on Money, and the Means of Economizing the Use of It,  Pelham Richardson, 1841, pp. 95, 105.

3The maximum number of notes that could be issued unbacked by gold. The 1844 Act set the figure at £14,000,000.

4Loyd, Samuel Jones, Remarks on the Management of  the Bank of England and of the Country Issuers, During the Year 1839, Pelham Richardson, 1840, p. 9. He became Lord Overstone on his father’s death in 1858.

5Schumpeter, Joseph, The History of Economic Analysis, Oxford University Press, 1994, p. 732.

In the first place, the ‘classic’ writers, without neglecting other cases, reasoned

primarily in terms of an unfettered international gold standard. There were  several reasons for this but one of them merits our attention in particular. An unfettered international  gold  standard will keep  (normally) foreign-exchange rates within  specie points and impose an ‘automatic’ link between national price levels and interest rates.

6Babbage, Charles, Economy of Machinery, John Murray, 1846. With respect to prices, productivity and the demand for labour see pages , 238, 268, 287-8, 334 and 340.

7Norman, George Warde, Remarks Upon Some Prevalent Errors With Respect to Currency and Banking, Pelham Richardson, 1838, p. 43.

8Torrens, Colonel Robert, On Wages and Combinations, Longman, Rees, Orme, Brown, Green, & Longman, 1834, Ch. II.

Senior, Nassau William, Political Economy, Pranava Books, Third Edition 1854, pp. 166-7.

9Landes, David The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present, Cambridge University Press, 1987 p. 233.    

10Jonson, P. D. Great Crises of Capitalism, Connor Court Publishing, Pty,  LTD, 2011, p. 282.

11Thornton, Henry, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, Messrs  F. & C. Rivington. 1802, pp. 258-70.

12Smith, Peter, Bad Economics, Connor Court Publishing, Pty, LTD, 2012, p. 82.

13In one of his posts at Catallaxy Kates stated that “Austrian theory had been designed to refute Marxists and socialists of all varieties but also was itself constructed on a demand-side focus based on marginal utility.” This is nonsense. Marxism had nothing to do with the emergence of the Austrian school. Moreover, the Austrian theory of the trade cycle was directly derived from Thornton’s trade cycle theory, which was formulated more than 16 years before Marx was born. In another post he asserted that the Austrians got “pretty close” to the classical theory of the trade cycle. Nothing of the sort, they took Thornton’s theory (the one the currency school adopted) and greatly refined it. I really am truly baffled as to how anyone could write about classical economics and the trade cycle and still manage to ignore Henry Thornton as well as the currency school.

14Torrens. Colonel Roberts, An Essay on the Production of Wealth, Longman, Hurst, Rees, Orme, and Brown, 1821, Ch. VI, section 6.

15Torrens, Colonel Robert, A Letter to the Right Honourable Lord Viscount Melbourne, 1837. In this ground-breaking 71-page letter Torrens used Thornton’s theory to explain how credit expansion caused the 1825 and 1836 financial crises. In doing this he was the first explain in detail how the money multiplier worked.

16Some years ago Alan Wood, formerly the economics editor of The Australian, wrote an article in which he attacked the gold standard on the specious grounds that its “costs in economic and social dislocation are too high” as shown by the nineteenth century. He made it look like the Black Death.

17Davidson also stated that Australia’s recovery from the Great Depression was caused by the 1931 January devaluation when Australia went off gold. This was quite an achievement when we consider that Australia abandoned gold in December 1929. A full 13 months before the devaluation and about 30 months before the recovery.  I fear Professor Davidson’s grasp of the gold standard is as dodgy as his grasp of economic history. This man really has no business attacking Rudd for “his complete ignorance of Australian economic history”. In fact, his treatment of Australia in the Great Depression is an excellent lesson on how not to write history.


4 thoughts on “Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 4”

  1. I look forward to reading these articles.Theyre an education. They’ve made me realise what a load of garbage we get on the gold standard from the media.

  2. I tried to read some of Mitchell’s stuff, Stryker. The one thing I got is that he’s no shrinking violet. So where is he?

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