The contemporary world is always testing his belief in central banking

Sunday, April 14th, 2019

Tyler Cowen considers some arguments for a gold standard:

Historical data indicates that industrial production volatility was not higher before 1914, when the U.S. was on the gold standard, compared to after 1947, when it mostly wasn’t. And there are similar results for the volatility of unemployment. That’s not quite an argument for the gold standard, but it should cause opponents of the gold standard to think twice. Whatever the imperfections of a gold standard might be, monetary authorities make a lot of mistakes, too.

Furthermore, in the broader historical context, including the more distant past, the gold standard doesn’t look so bad. The age of the gold standard (and sometimes silver standard, and sometimes bimetallism) in the 19th century was largely one of peace and economic growth, running from 1815 until World War I. The fiat money era that followed was a disaster, as the 1920s brought monetary chaos, competitive devaluations, and even some hyperinflations and deflations, a few of which were driven by the desire to restore the old gold par at incorrect rates. It would have been better had the world managed to keep its gold-centered monetary order of 1913.

Even the Bretton Woods arrangement, which has a good record in terms of stability and growth, involved gold convertibility of a sort, albeit with no domestic convertibility and lots of pressures to discourage actual conversion from foreigners. Once the tie of the dollar to gold broke entirely in the early 1970s, inflation and interest rates were high and again monetary chaos followed. From the vantage point of, say, 1979, some form of gold standard really did seem better.

What was not obvious then was that monetary policy was going to be so good and so stable for the next four decades, albeit with a number of mistakes. Today’s case for the gold standard is based on the view that these recent decades of good fiat money management are a historical outlier and cannot be sustained. I don’t share that opinion, but neither do I think it is crazy or a sign of extreme ignorance.

So why don’t I favor a gold standard? First, governments have a long history of interfering with gold standards, for better or worse. So it doesn’t really remove politics from monetary policy. Second, central banks should respond with extreme countercyclical pressure when a financial crisis hits, such as in 2008. That is harder to do with a gold standard, and usually it requires the suspension of gold convertibility. Third, the price of gold is now greatly influenced by demand from China and India, and it seems unwise for that to partially drive what is in essence U.S. monetary policy. Most generally, I still think central bank governance can do a better job than a gold-based system that sometimes creates excess deflationary pressures.

Nonetheless, the contemporary world is always testing my belief in central banking.


  1. CVLR says:

    Personally, I’ve always found the world to make much more sense when viewed through the lens of who, whom.

    For example, that Louis “First Diverse Member of the Supreme Court” Brandeis both led the charge against the “robber barons” and the charge for the fiat overlords. Confusing at first, unless one figures that he was acting in harmony with his people’s interests.


    I still remember the crimestop I experienced in watching that video for the first time. Ah, those were the days.

  2. Kirk says:

    Money and the economy are mostly a game we play with each other, and it’s all too easy to lose sight of that fact in all the details.

    One way or another, the power to set the rules is always going to result in abuse. The smart way to reduce that abuse is to keep the amount of power diffuse and spread out over all the participants, because concentration is all too tempting for the power-mad. You establish a power-sink, where it gathers? They’re gonna go for it like moths to a flame.

    How you fight this sort of thing, effectively, in a modern economy? Well, what has to happen is that we quit investing these assholes with the power, and quit asking the government to do everydamnthing. The siren song of Big Daddy Government is one that has to be resisted, because once he takes you under his inimical wing, your freedom of choice is over.

    I sort of hoped the cryptocurrency guys had figured out a way to decentralize the exchange medium, but the more I looked into that crap, the more I came to suspect that either I wasn’t smart enough to understand any of it, or it was a scam. Either way, I’m not investing a dime in it.

  3. Alistair says:

    Crypto may ultimately work in undermining fiat power. The theory seems sound. But the technical accessibility remains an issue.

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