On the Gold Standard: Why Depressions Have Been a Necessary Evil, or How the Economics of Keynes Dethroned Europe

Abstract

Before the nuclear age, the emergency military defense of a wealthy nation was a prolonged and expensive affair. The main advantage of adopting the gold standard was that it provided the country with a unique ability to finance such large-scale military emergencies. Although necessitating post-war depressions, this financial advantage of a gold standard appears to have been necessary for the military survival of pre-nuclear modern democracies. Again, this financial sine qua non arises because there is a time-inconsistent, overly appeasing, response of any narrowly rational legislature to each in a series of broadly rational threats of all-out-war by external aggressors demanding individually small favors. A democratic nation whose underlying military leaders are unable to overcome this legislative time-inconsistency by independently financing the nation’s expensive military emergencies is soon rationally subjugated by such aggressors. Britain’s premature, Keynes-inspired, abandonment of the gold standard in 1931 generated a case in point.