The U.S. is the Gold Standard of International Relations — That is *Not* A Good Thing!

Canada and its *true* allies need to abandon this "Gold Standard" and work toward greater stability and prosperity without it

Photo Source: The Globe and Mail.

Well, Donald Trump is at it again! As reported by The Globe and Mail:

U.S. President Donald Trump said he would impose 35-per-cent tariffs on imports from Canada starting Aug 1, upping pressure on Ottawa as it seeks to secure a deal with the White House over the next week.

In a letter posted on his website Truth Social on Thursday evening, Mr. Trump said he would increase the tariffs that were imposed on Canada in March and currently stand at 25 per cent. Mr. Trump justified the levies as an effort to force Canada to do more to address U.S complaints about fentanyl trafficking and illegal migration.

While trying to keep my infamous cool over this latest news, I realized it reminded me of the Gold Standard.

Let me explain.

Canada During the Actual Gold Standard

As written in the Bank of Canada’s The Canadian Dollar under the Gold Standard (1854-1914):

From 1 August 1854 when the Currency Act was proclaimed, until the outbreak of World War I in 1914, the Province of Canada, and subsequently the Dominion of Canada, was continuously on a gold standard. Under this standard, the value of the Canadian dollar was fixed in terms of gold and was convertible upon demand.

…

With the gold standard in place, monetary policy was largely “on automatic pilot.” Paper money was freely convertible into gold without restriction, and there were no controls on the export or import of gold. This implied that there was virtually no scope for the authorities to manage the exchange rate or to conduct an independent monetary policy.

To some people, putting monetary policy “on automatic pilot” is a good thing because it takes human biases and incompetence out of the equation. But how did it work out in reality, both during the Gold Standard and after it was abandoned by Canada?

First, we can see the trend in growth of Canadian real per-capita gross national product (GNP) in Figure 1 below.

Figure 1. Data Source: McInnis, Marvin (Queen’s University Dataverse). “Historical Canadian Macroeconomic Dataset, 1871-1994”.

Figure 1 shows that during the late-1800s, Canada experienced an on-again/off-again depression — not just a recession — as our national income demonstrated extreme volatility due largely to the Gold Standard, which prohibited Canadian authorities from using any monetary policy tools to stabilize the economy.

In one year we might experience near-double-digit growth rates, but then the next year those growth rates would be negative.

In short, it was difficult for anyone in Canada to plan their operations — whether those operations be business or household — from year-to-year. Their decisions were subject to the whims of outside forces, which included the supply of gold.

Keep in mind the fact that we were subject to the whims of some external force.

Then the “Great Boom” began in 1896 — the yellow area in the chart — which was not coincidentally when the Klondike Gold Rush occurred, thus increasing the supply of gold and consequently the money supply. While there were still wild swings in real GNP growth rates, these rates tended to be high and positive.

Canada then temporarily left the Gold Standard when World War I began in 1914, and briefly returned to it again from 1926-31. Then the Great Depression hit us all and we left the Standard permanently because the Canadian government realized we needed to use both monetary and fiscal policy tools to stabilize the economy.

Partly due to these policy tools, economic growth became much more stable — and rarely negative — following the end of World War II.

Still need more evidence? Please see Figure 2 below which shows Canadian inflation rates over time. We can again see wild volatility before the Gold Rush followed by relatively more stable rates during the “Great Boom”. Furthermore, while inflation rates were often high after the end of WWII, the Bank of Canada figured out how to maintain low-and-stable rates at roughly 2% per year following the early-90s recession.

Figure 2. Data Sources: Green, A.G. and M.C. Urquhart (1994), “Estimates of Output Growth in Canada: Measurement and Interpretation” in Douglas McCalla and Michael Huberman (eds.) Perspectives on Canadian Economic History, Second Edition, pp. 158-75 (Table 1); and Statistics Canada, CANSIM II Series #V41693271.

Finally, interest rate trends are shown in Figure 3 below in terms of Canadian government bond yields. During the late-1800s, nominal interest rates were rather stable, but given inflation rates real returns were quite volatile: in one year, borrowers made off like bandits when the value of interest payments went down significantly, while in other years they were in deep despair when inflation significantly raised how much they had to pay their creditors in real terms. Following WWII, real rates became more stable and rarely negative, particularly after 1956.

Figure 3. Data Source: McInnis, Marvin (Queen’s University Dataverse), “Historical Canadian Macroeconomic Dataset, 1871-1994”.

The “Gold Standard” of International Relations

So going back to Trump, I see strong similarities between tying Canada’s economy to the U.S. economy and tying it to the supply of gold: we can have very good times when our “anchor” is working in our favour, like we did during the Great Boom in terms of the actual Gold Standard, and like we did in the years between the end of WWII and the end of President Obama’s time in office in terms of international relations.

But when it does not work in our favour, we are in deep trouble because our economy is subject to the whims of outside forces which have no ability to consider the effects of their actions on everyone else. Furthermore, there is nothing we can do but wait it out and hope something changes to give us another “Great Boom”…

…or we could stop tying ourselves to the “Gold Standard”!!!

It is not easy because as shown in the above charts, it takes time to maintain stability given transition costs — it was not until the 1990s when stability was truly realized in Canada’s economy —but it is well worth it in the end.

The Canadian government — with cooperation from provincial governments — needs to give up on hoping we can satisfy Trump, or even that things will get better after he is out of office. We need to strengthen our ties with our true allies around the world, including Australia, New Zealand, the EU, the U.K., Mexico, Japan, and South Korea.

We need to find ways to manage our economy where we have the power, as opposed to relying on some uncontrollable outside force.

Closing Remarks

“Just give Trump what he wants on [the border/DST/supply management/some other stupid complaint] so he can have a ‘win’ and we can get back to negotiations”, they say.

When will these people realize that getting Trump to make a deal — never mind one he will not violate later on — is a unicorn dream? Give it up already and stop wasting time trying to appease him!

Move on and use our resources to expand trade with countries we can trust, and in doing so build a strong common front to fight back against Agent Orange!!!

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