ing the quantity of money in order to drive oth-
lead into gold?" and "What if a golden mete-
ers prices upward, thus eliminating deflation
orite hit the earth?" But these are of no more
"on average." But there is no social benefit in
actual relevance than "What if the Federal
doing so. Falling costs of production in steel
Reserve chairman becomes insane?"
(i.e. productivity gains) do not discourage
"A gold standard would be a source of
investment in steel. A gradual anticipated
harmful deflation." The inflation rate under
deflation does not discourage investment,
the gold standard averaged close to zero over
especially not when productivity gains are dri-
generations, sometimes slightly positive and
ving growth in the first place.10
sometimes slightly negative over individual
decades. Rolnick and Weber, as quoted above,
Nor does a deflation penalize debtors once
found an average inflation rate of 1.75 percent
it comes to be anticipated, because nominal
over the sample of gold and silver episodes
interest rates adjust downward to reflect antic-
reported in the published version of their
ipated repayment in dollars of higher pur-
paper; an earlier version using a different sam-
chasing power.
ple arrived at an average rate of -0.5 percent. In
"The gold standard was responsible for
1879 the United States resumed gold redemp-
the U.S. banking panics of the late 19th
tion for the U.S. dollar, which had been sus-
century and for the monetary contraction
pended since the Civil War. Between 1880 and
of 192933 and, thereby, for the Great
1900 the United States experienced one of the
Depression." The U.S. monetary contraction
most prolonged periods of deflation on record.
of 192933 is the prime example of a harmful
The price level trended more or less steadily
deflation. It should be noted that it happened
downward, beginning at 6.10 and ending at
on the Federal Reserve's watch. The episode
5.49 (GDP deflator, base year 2000 = 100). That
should not be blamed on the gold standard,
works out to a total decline of 10 percent
but on the combination of a weak banking
stretched over 20 years. The deflationary peri-
system and a befuddled central bank. The U.S.
od was no disaster for the real economy. Real
banking system was prone to runs and panics
output per capita began the period at $3,379
in the late 19th century and continued to be so
and ended it at $4,943 (both in 2000 dollars).
through the 192933 episode in which the Fed
Total real per capita growth was thus a more-
stood by and did not supply replacement
than-healthy 46 percent. (Real GDP itself more
reserves to keep the money stock from con-
than doubled.)9
tracting. Other countries on the gold stan-
dard--Canada, for example--had no banking
Monetary economists distinguish a benign
panic in 192933 (nor did Canada have panics
deflation (due to the output of goods grow-
in the late 19th century), so the gold standard
ing rapidly while the stock of money grows
couldn't have been responsible for the panics.
slowly, as in the 1880-1900 period) from a
The U.S.
Rather the panics were due to completely
harmful deflation (due to unanticipated
monetary
avoidable legal restrictions (namely the ban on
shrinkage in the money stock). The gold
contraction of
branch banking and compulsory bond collat-
standard was a source of mild benign defla-
eral requirements that make the supply of
tion in periods when the output of goods
192933 is the
banknotes "inelastic") that weakened the U.S.
grew faster than the stock of gold. Prices par-
prime example
banking system.
ticularly fell for those goods whose produc-
of a harmful
"The benefit of a gold standard (restrain-
tion enjoyed great technological improve-
ing inflation) is attainable at less cost by
ment (for example oil and steel after 1880).
deflation. It
properly controlling the supply of fiat
Strong growth of real output, for particular
should be noted
money." Although growth in the stock of fiat
goods or in general, cannot be considered
money could in principle be as slow (or slower)
harmful.
that it happened
than growth in the stock of gold under a gold
It would be possible for the central bank
on the Federal
standard, it has not been so in practice, as
under a fiat money standard to offset produc-
Reserve's watch.
already noted.
tivity-driven declines in some prices by expand-
4