Of course I didn’t expect my recent post, listing “Ten Things Every Economist Should Know about the Gold Standard,” to stop economists from repeating the same old misinformation. So I’m not surprised to find two of them, from the New York Fed, repeating recently some of the very myths that I would have liked to lay to rest.
The subject of James Narron and Don Morgan’s August 7th Liberty Street Economics post is the California gold rush. After describing the discovery at Sutter’s mill and the “stampede” of prospectors anxious to get their hands on part of the “vast quantities of gold” whose existence that discovery had revealed, Narron and Morgan observe that the
large gold discovery functioned like a monetary easing by a central bank, with more gold chasing the same amount of goods and services. The increase in spending ultimately led to higher prices because nothing real had changed except the availability of a shiny yellow metal.
No economist worthy of the name would deny that, other things being equal, under a gold standard more gold means higher prices. But other things evidently weren’t equal in the U.S. in the late 1840s and early 1850s, for if they had been the path taken by the U.S. CPI between 1830 and 1880 would not have looked as it does in the chart shown below, which was also in my above-mentioned post:
*Graphing Various Historical Economic Series,” MeasuringWorth, 2015.
As you can see, the gold rush didn’t even cause a blip in the CPI, which was about as stable from 1840 to 1860 as it has ever been. Indeed, prices fell slightly, making for an annual inflation rate of minus .19 percent. For the shorter period of 1845 to 1860 the inflation rate is, admittedly, much higher: a whopping .63 percent. But even this higher rate is, according to the Fed’s current credo, was dangerously low. Were one to assume that a 2 percent inflation rate was as desirable 167 years ago as Fed officials claim it to be today, one would have to conclude that the gold rush, far from having made the U.S. money stock grow too rapidly, didn’t suffice to make it grow rapidly enough.