Correspondingly, the purchasing power of
chasing power of gold had actually risen
slightly (the price level was slightly lower).2
money under the gold standard was steadier
and more predictable. The greater reliability of
The economic historian Hugh Rockoff, in
the purchasing power of the monetary unit
an examination of the output of gold, con-
under the gold standard was reflected in a
cluded that "it is fair to describe the fluctua-
thicker market for long-term corporate bonds
tions in the supply of gold under the classical
standard as small and well-timed."3 He found
than exists today. Under a gold standard, the
price level can be trusted not to wander far
that supply of fiat money in the postwar peri-
over the next 30 years because it is constrained
od (194979), by contrast to the behavior of
by impersonal market forces. Any sizable price
gold under the classical gold standard, had
level increase (fall in the purchasing power of
both higher annual rates of growth and a
gold) caused by a reduced demand to hold
higher standard deviation of annual growth
gold would reduce the quantity of gold mined,
rates around decade averages.
thereby reversing the price level movement.
In a study covering many decades in a large
Conversely, any sizable price level decrease (rise
sample of countries, the Federal Reserve Bank
in the purchasing power of gold) caused by an
of Minneapolis economists Arthur Rolnick and
Warren Weber4 similarly found that "money
increased demand to hold gold would increase
The purchasing
the quantity mined, thereby reversing that
growth and inflation are higher" under fiat
power of money
price level movement. Under a fiat standard,
standards than under gold and silver standards.
the future price level depends on the personal-
Specifically, they reported that
under the gold
ities of yet-to-be-appointed monetary authori-
standard was
ties and thus is anybody's guess.
the average inflation rate for the fiat
steadier and
The blogger Megan McArdle thus gets
standard observations is 9.17 percent
things almost exactly backward when she
per year; the average inflation rate for
more predictable.
writes: "The gold standard cannot do what a
the commodity standard observations
is 1.75 percent per year.5
well-run fiat currency can do, which is to tailor
the money supply to the economy's demand
for money."7 Under the gold standard, market
This result was not driven by a few
extreme cases; in fact, in computing the aver-
forces do in fact automatically tailor the money
age rates of inflation Rolnick and Weber
supply to the economy's demand for money.
deliberately omitted cases of hyperinflation
The economics of gold mining operates to
(which occurred only under fiat money). Still,
match world supply with world demand at the
they noted,
stable price level (though admittedly large
demand shocks can take years to be accommo-
every country in our sample experienced
dated), while the "Price-specie-Flow mecha-
a higher rate of inflation in the period
nism" quickly brings gold from the rest of the
during which it was operating under a
world into any single country where demand
fiat standard than in the period during
for money has grown. We can only imagine a
which it was operating under a com-
well-run fiat-currency-issuing central bank try-
modity standard.6
ing to match these properties. We cannot
observe any central bank that has actually
managed it. Peter Bernholz, for example, tells
The evidence thus indicates that growth in
us that "a study of about 30 currencies shows
the stock of gold has been slower and steadier
that there has not been a single case of a cur-
in practice than growth in the stock of fiat
rency freely manipulated by its government or
money. Of course, U.S. inflation is thankfully
central bank since 1700 which enjoyed price
not as high as 9 percent today, but at 4.3 per-
stability for at least 30 years running."8
cent (consumer price index, year-over-year) it is
currently more than twice as high as Rolnick
Some critics have posed absurd-case sce-
and Weber's figure for commodity standards.
narios, such as "What if some alchemist turns
3