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The gold standard

Posted by
August 10, 2015
in Blog

The gold standard is a commodity money standard where gold and gold-redeemable assets serve as money. The monetary unit is defined as a particular weight and fineness of gold. For example: $1 = 1/20 oz of gold. Here’s an excellent video on the gold standard featuring Lawrence H. White.

Sometimes the gold standard is described as a fixed exchange-rate regime because the dollar value is fixed to the value of gold. But, that’s not quite right. That language presupposes that someone is managing the exchange rate. Under a true gold standard, the rate is not fixed—it is definitional. Stating that the dollar is fixed to gold under a gold standard is akin to saying 1 foot is fixed to 12 inches. It isn’t fixed, but rather is defined as such. If you ask me for a dollar under the gold standard, you would be expecting me to hand over 1/20 oz of gold.

George Selgin provides a thorough summary of the historical gold standard’s rise and fall in the United States. It is well worth reading.

Most modern advocates for a gold standard refer back to the international classical gold standard, which lasted from roughly 1870 to 1913. In addition to providing an endogenous money supply, the international gold standard enabled individuals from different countries to trade with one another in the absence of exchange rate risk because they were all employing the same commodity as money. If it is less risky to trade, we should expect individuals to trade more. And a larger trading region enables greater specialization and the division of labor.

If you are familiar with the debates surrounding currency areas like the Euro Zone, you have probably heard that the benefits of greater trade from a common currency must be weighed against the loss of a country’s ability to conduct independent monetary policy. Under a gold standard, the money supply is governed by the commodity money mechanism. Hence, one can enjoy the benefits of a common currency without being subject to the whims of some other country pursuing its desired monetary policy.

In his wonderfully titled policy brief, “Is the Gold Standard Still the Gold Standard among Monetary Systems?”, Lawrence H. White notes:

The gold standard is not a flawless monetary system. Neither is the fiat money alternative. In light of historical evidence about the comparative magnitude of these flaws, however, the gold standard is a policy option that deserves serious consideration.

White’s brief includes a fairly comprehensive FAQ on the gold standard. Unlike most considerations of the gold standard, White’s analysis is historically informed. As they say, read the whole thing.