Friday, July 4, 2014

My One Paragraph Summary of the Gold Standard

Here is the conclusion of an essay I am working on for a macroeconomics anthology/textbook. The essay is essentially a less technical summary of my "Good as Gold?" paper, currently under review at the Financial History Review.
Both during and after the classical gold standard, policies of governments and central banks were responsible for unusual changes in prices. First, with the demonetization of silver during the 1870s, prices fell as demand for gold outpaced the growth of the gold stock. The increase in demand, however, was not so severe as to cause an international depression. By the end of the classical era, changes in policies had a much greater impact on prices. Instead of exerting a persistent, but shallow, downward effect on prices, prices in terms of gold became unhinged. Rising rapidly during and shortly after the war, then falling dramatically in two stages. Each of these swings was accompanied by substantial changes in gold holdings by central banks.  When central banks had finally consolidated nearly all of the world’s monetary gold stock at the end of the 1920s, increased demand for gold pushed down prices persistently enough to initiate the Great Depression. By this logic, it appears that the Great Depression was not a glitch, but was the logical end of a monometallic standard. The elimination of metallic base money substitutes by governments and sweeping consolidation of gold made the international monetary system increasingly fragile until, in 1929, it broke.


  1. James, first of all, I think I must have read something about bimetalism from you before... the above rings a bell. All I remember from what I read before (whoever wrote it) was that bimetalism compared favorably to a gold only standard. Does that sound like something you would have written?

    Secondly, O/T: which post were you attempting to respond to with this comment?:

    It almost sounds like a response to Mike Freimuth instead of Cullen, for example this:

  2. I corrected that now...

    I remember you having noted that I seem to support bimetallism in a comment from Sumner's blog. That's not quite the case. I note that the demise of bimetallism was simply the final step to the international gold standard. I don't at all support legal tender regimes, especially not with fixed exchange rates. My belief is that arbitrage would have sooner or later destroyed bimetallism if it had not fallen in the 1870s.