Key Monetary Writings

Myth 11: Setting the New Gold Parity is Too Hard

The danger of setting the new gold parity too low (too few dollars per ounce of gold) is exemplified, as Selgin (2012) notes, by Great Britain’s choice in 1925 to restore the old parity. At discussed above, because the price level had risen sharply, a return to the old parity required a sharp deflation to return to the old price level.  The danger of setting the parity too high is, conversely, a transition inflation to reach the new equilibrium price level.  Eichengreen (2011) summarizes the problem this way:
Envisioning a statute requiring the Federal Reserve to redeem its notes …
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The Federal Reserve System’s Influence on Research in Monetary Economics

The Federal Reserve System is a major sponsor of monetary economics research by American economists. I provide some measures of the size of the Fed’s research program (both inputs and published outputs) and consider how the Fed’s sponsorship may directly and indirectly influence the character of academic research in monetary economics. In particular, I raise the issue of status quo bias in the Fed-sponsored research. … Read more

Myth 10: Fiat Money is Necessary to Have a Lender of Last Resort

Barry Eichengreen (2011) writes:
Under a true gold standard, moreover, the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster. Its proponents paint the gold standard as a guarantee of financial stability; in practice, it …
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Myth 9: A Gold Standard is Vulnerable to Speculative Attacks

My frequent co-author George Selgin (2012) finds it “more doubtful [today] than ever before that any government-sponsored and administered gold standard will be sufficiently credible to either be spared from or to withstand redemption runs.” He quotes James D. Hamilton (2005) to similar effect:  given that central banks the Treasuries on the gold standard can and often have left it, and given “that speculators know this,” it follows “that any currency adhering to a gold standard will…be subject to a speculative attack.”  Selgin adds:  “The breakdown in the credibility of central …Read more

Myth 8: The Gold Standard Helped Spread the Great Depression to the Rest of the World

The second part of the “Golden Fetters” indictment, to quote a recent statement of it (Bordo 2010, p. 40), is that “The Great Depression spread across the world via the fixed exchange rate gold standard.”  In Eichengreen’s (1992, p. xi) earlier words, the international gold standard “transmitted the destabilizing impulse from the United States to the rest of the world.” This description of events has some truth to it – but is misleadingly incomplete.  The destabilizing impulse, as emphasized in the previous section, came from the Federal Reserve and Bank of France sterilizing gold …Read more

Myth 7: The Gold Standard was Responsible for the Deflation that Ushered in the Great Depression

The most prominent set of criticisms of the gold standard among academic economists in recent years blame the gold standard for the creating the Great Depression in the United States and for then spreading it internationally.  Douglas Irwin (2011, p. 1) summarizes the case and identifies its most cited source:
Modern scholarship regards the Depression as an international phenomenon, rather than as something that affected different countries in isolation. The thread that bound countries together in the economic collapse was the gold standard. Barry Eichengreen’s 1992 book Golden Fetters is …
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Myth 6: A Gold Standard Amplifies Business Cycles

In response to my 2008 piece the economist Tyler Cowen (2008), on his well-known blog Marginal Revolution, wrote: My main worry with the gold standard is simply the pro-cyclicality of the money supply … . For instance would you really want a contracting money supply in today’s environment? And yes credit crunches of this kind happen in market settings too so you can't blame it all on Alan Greenspan.” Cowen’s worry here does not appear to be about the pro-cyclicality of the gold supply. Gold mining is actually counter-cyclical with respect to the price level: a falling price level denominated …Read more

Myth 5: A Gold Standard Too Rigidly Ties the Government’s Hands

One of the slides for Ben Bernanke’s (2012) lecture at GWU reads as follows: The strength of a gold standard is its greatest weakness too: Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions. Note the passive wording: cannot be adjusted.  Adjusted by whom or by what?  On a previous slide Bernanke indicated that he was assuming an automatic gold standard, without a central bank able to do any significant adjusting of the money supply.  But under a gold standard a change in the money supply can also be …Read more

Myth 4: A Gold Standard Would be a Source of Harmful Secular Deflation

“The most fundamental argument against a gold standard,” writes Tyler Cowen (2011) “is that when the relative price of gold is go[ing] up, that creates deflationary pressures on the general price level, thereby harming output and employment.”  Barry Eichengreen (2011) offers a similar criticism:
As the economy grows, the price level will have to fall. The same amount of gold-backed currency has to support a growing volume of transactions, something it can do only if the prices are lower, unless the supply of new gold by the mining industry magically rises at the same rate as the output …
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Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff
(1896-1978)

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