free of a central bank provides a commitment
an enforceable commitment not to use sur-
to non-inflation made good by the impersonal
prise monetary expansion and resulting infla-
tion as a temporary stimulus to the economy.17
economics of gold mining (for gold itself) and
by enforceable redemption contracts and the
When the public knows that the central bank
competitive market value of reputation (for
would be tempted to use surprise inflation, the
bank-issued money).20
public rationally expects higher-than-optimal
inflation. The central bank has to deliver high-
"Fiat money is necessary so that a
er-than-optimal inflation to avoid a negative
lender of last resort can meet the liquidity
surprise. An unfortunate standoff is reached at
needs of the banking system." History
a higher-than-optimal inflation rate (which,
shows that a lender of last resort would hard-
being fully anticipated, provides no economic
ly be needed, given a stable monetary regime
stimulus). A gold standard avoids that trap.18
and a sound banking system (again it is
instructive to contrast the United States with
Like tying Ulysses to the mast, it achieves better
Canada in the 19th century). In the rare cases
results by removing the option (to use surprise
such a lender might be needed, bank clear-
inflation) that leads to ruin. Of course, a gold
inghouses could play the role.21
standard is not the only possible rule for con-
straining the creation of money. Alternatives
"Switching to a gold standard would
The nation
include a Friedman-type money-growth rule,
involve massive transition costs." The
would not enjoy
or an inflation targeting rule. But the gold
transition cost involved in reestablishing a
standard has a longer history, and is the only
gold definition for the dollar would be small.
the benefits of
historically tested rule that does not presup-
Unlike with Europe's transition to the euro,
being on an
pose a central bank.
price tags and bank accounts would not need
international gold
Leaving money issue in the hands of pri-
to be redenominated because the name "dol-
vate banks rather than a government institu-
lar" would be retained. At the right reentry
standard if it were
tion, as the United States did before 1913,
rate, dollar prices would not need to jump.
the first and only
removes the option to use surprise monetary
"We must have gone off the gold stan-
expansion one step further. It remains true
dard in the first place for good reasons." In
country whose
that government can suspend the gold stan-
1933, President Franklin D. Roosevelt deval-
currency was
dard in an emergency, as both sides did during
ued from $20.67 to $35 per troy ounce of gold
linked to gold.
the Civil War, but the spirit of the gold stan-
as a means to re-inflate the dollar price level.
dard calls for returning to the parity afterward,
But the (harmful) money stock shrinkage and
as did the United States.19 Judging by long-
price deflation of 192933 hadn't been due to
a loss of gold. It had been due to a collapse of
term interest rates and the thick market for
weak U.S. banks. The deflation could have
long-term bonds under the post-bellum classi-
been remedied by better monetary policy and
cal gold standard, the risk of permanent deval-
banking reform without going off gold. In
uation or suspension was considered small.
1971, Nixon shut the gold window because
"A gold standard, like any fixed ex-
the Federal Reserve had expanded the stock of
change-rate system, is vulnerable to specu-
dollars too much to maintain the $35 per
lative attacks." What opens the door to spec-
ounce parity. Nixon's action could have been
ulative attacks is a weak commitment to the
avoided had the Fed not expanded the stock of
existing parity, whether in gold or any other
dollars so much in the 1960s. It was not the
reserve currency. A central bank's commitment
rules of the gold standard that had failed. It
can be weak, and that is indeed a problem
was, rather, the Fed that had failed to abide by
when combining a gold standard with central
the rules of the gold standard.
banking. Fortunately, a gold standard doesn't
"The gold standard is an example of
require a central bank. With decentralized pri-
price-fixing by government." The gold stan-
vate money issue, there is no institution capa-
dard doesn't fix a price between dollars and
ble of devaluing, so there is no danger of spec-
gold any more than the traditional British mea-
ulative attacks on the parity. A gold standard
6