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Posts Tagged ‘Gold Standard’

I’ve linked before to Professor George Selgin’s masterful video on the Federal Reserve’s horrible track record, and I’ve done my own video on the origin of central banking.

These types of posts often generate questions about what reforms we should support, and a lot of people ask about the gold standard. I’m not a monetary economist, so I’m not in a position to give competent answers. Fortunately, Prof. Selgin has decided to provide a very useful analysis of the issue.

Writing for a British paper, he explains that a genuine gold standard worked very well before World War I, but it probably wouldn’t work today because governments are so untrustworthy.

Of all the reasons usually given for condemning the gold standard, perhaps the most common is the claim that it was to blame for the Great Depression. What responsible politician, gold’s critics ask rhetorically, wants to relive the 1930s? But the criticism misses its mark. Fans of the gold standard are no more anxious to repeat the 1930s than their critics are. Their nostalgia is instead for the interval of exceptional international monetary stability that prevailed from the mid-1870s until World War I. That was the era of the classical gold standard – a standard policed by the citizens of participating countries, all of whom were able to convert their nations’ paper money into gold. This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone. …the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it. …the collapse of the gold-exchange standard forever undermined the public’s confidence in governments’ monetary promises; and absent such confidence there can be no question of a credible, government-sponsored gold standard, classical or otherwise. Sometimes with monetary systems, as with life, you can’t go home again.

I’m also glad that he explains that the gold standard was not responsible for the Great Depression. If you want to know more about that issue, including the damaging impact of statist policies by Hoover and FDR, this video is an excellent introduction.

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The Free Market Mojo site asked me a number of interesting questions about public policy. I’m not sure all of my answers were interesting, but here are some snippets that capture my curmudgeonly outlook.

I think it’s important to divide the topic into two issues, the policies that cause short-run fluctuations and the policies that impact long-run growth. Generally speaking, I try to avoid guessing games about what is happening today and tomorrow (or even yesterday), and instead focus on the policies that will boost the economy’s underlying productive capacity. …the Fed’s easy-money policy was a mistake. If the central bank had behaved appropriately, we presumably would not have suffered a financial crisis and recession. And if we go back in history, we find the Fed’s fingerprints whenever there is an economic meltdown. …I would not want the government to impose a gold standard. Competitive markets should determine the form of money and/or what backs up that money. Perhaps gold would emerge in such a competitive system, but a gold standard should not be imposed. …I don’t trust politicians. They would pass a bill to impose a VAT while simultaneously phasing out the income tax over a five-year period. But inevitably there would be some sort of “emergency” in year three and the income tax would be “temporarily” extended. When the dust settled, temporary would become permanent and we would be a decrepit European-style welfare state. …There are many great economists, but for my line of work, Milton Friedman has to be at the top of the list. He had an incredible ability to explain the benefits of liberty and the costs of statism in a way that reached average people.

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