The True Gold Standard (Second Edition)
Lawrence H. White is an economics professor at George Mason University who teaches graduate level monetary theory and policy.
As described by the Wikipedia, "White earned his BA at Harvard University (1977) and PhD at the University of California at Los Angeles (1982). Before his current role at George Mason University he held a position as F. A. Hayek Professor of Economic History with the University of Missouri–St. Louis Economics department from 2000 to 2009, teaching American Economic History, Monetary Theory, and Money and Banking. Previously, he was Assistant Professor at New York University and Associate Professor at The University of Georgia in Athens, Georgia.
"Articles by White on monetary theory and banking history have appeared in the American Economic Review, the Journal of Economic Literature, the Journal of Money, Credit, and Banking as well as other professional journals. White is an associate editor of the "Review of Austrian Economics", a contributing editor to the Foundation for Economic Education's magazine The Freeman and an adjunct scholar of the Cato Institute." Thegoldstandardnow.org is pleased to present this exclusive interview in three parts, of which this is the first.
Q: When and how did you first get interested in the gold standard?
My initial exposure to thinking about the gold standard came from reading the Austrian-school economists Mises, Hayek, and Rothbard. The first time I remember taking a serious interest was when I wrote a term paper for a college course on international monetary economics. I discussed Hayek’s analysis of the gold standard in his 1937 book Monetary Nationalism and International Stability. Hayek argued that a gold standard works better without any central bank intervention that tries to slow down or speed up international gold flows, and without any national-border restrictions on gold-based banking systems.
Q: The gold standard is, shall we say, unfashionable. You stated at a Cato presentation that interest in the gold standard tends to get an academic marginalized, in some respects. To what do you attribute this.
Many mainstream academic monetary economists, whether “neoclassical” or “New Keynesian,” view their role as advising (or potentially advising) the central bank in its efforts to engineer a stable macro-economy through a well-designed monetary policy. The game is to contribute to the improvement of policy under the current regime, not to consider alternative regimes. (The influence of the Federal Reserve and other central banks as the leading employers of monetary economists presumably helps to set this agenda.) They seldom study monetary history outside postwar US data sets. Instead they focus on fitting the postwar data to blackboard models of fiat monetary policy, looking for the policy that optimizes some objective function. That’s their game. If that’s your perspective, then research on the idea of a hands-off system probably seems bizarre.
Q: You have published (including republication here) very lucid refutations to the many myths surrounding the gold standard. Which one, or few, of these myths do you consider most pernicious?
Among the myths that I addressed, the myth that seems to be most influential among economic theorists is the idea that the instability of the price of gold today shows that gold is a poor monetary standard. People who express that idea fail to recognize that a “Lucas Critique” applies: data from a regime in which gold is demonetized don’t speak to the behavior of the purchasing power of gold under a regime where gold is the basic money. For that you need to study the track record of the classical gold standard.
Among economic historians, the leading myth is that the gold standard amplified business cycles, or more specifically was responsible for causing or spreading the Great Depression. In the general case, they are unaware of how revised GDP statistics have downgraded the postwar period’s stability relative to the classical gold standard period. In the case of the Great Depression, they are failing to distinguish the classical gold standard from the interwar gold-exchange. Central banks that no longer “played by the rules of the game” during and after World War One worked to subvert the gold standard during the interwar period. Those interferences, not the automatic functioning of the gold standard, created the instability.
Q: Have you noticed any significant evolution in the discourse over the years, both within the classical liberal, such as Austrian, school, more widely in the academy, in the general literature, or in the policy institutes in Washington?
A: I’m too close to it to be an objective observer. But I would say that the automatic gold standard and other systems that dispense with central banking are now getting more attention among classical liberals than they did in the heydays of Keynesianism and Monetarism. In the academy, I’m encouraged that there are more economists in the generation younger than me that are interested in discussing alternative monetary regimes than there were in my generation. Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience. The Heritage Foundation is now showing some interest. The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.
Q: Who do you consider some of the most interesting writers on the topic of the gold standard, both academically and among public intellectuals, both historical and contemporary ones?
A: In contemporary discussion, Benn Steil and Manuel Hinds are doing very interesting work. Their Money, Markets, and Sovereignty, published in 2009, is an outstanding work, which they have followed up with timely articles.
In the nineteenth century, Nassau Senior provided the analytical core of the gold standard model that I develop in my book The Theory of Monetary Institutions. In the twentieth century, Ludwig von Mises in The Theory of Money and Credit gives us great insight into the working of the gold standard in the presence of a modern banking system.
To be continued.