Econ Duel: Gold vs. Fiat Money

There’s a new Econ Duel, with me debating Larry White on the gold standard. Check it out.



48 Responses to “Econ Duel: Gold vs. Fiat Money”

  1. Gravatar of Kevin Erdmann Kevin Erdmann
    20. December 2016 at 12:02

    Great video.

  2. Gravatar of Ray Lopez Ray Lopez
    20. December 2016 at 12:41

    Before I even read it, I’ll give a fair and balanced opinion that Sumner lost…now let me view it…

    Sumner looks young for his age…@2:00 mark, White correctly claims no demand shock for gold, hence no great gold demand that would create distortions (besides money is neutral, though he doesn’t say this).. @3:10 mark, price swings less under gold (good point, though price shocks are not that big a deal for most people)… 100 year bonds, perpetual bonds possible with gold, but not with fiat. .. @4:17 Sumner proposes a ‘well run fiat money system’ (in his mind’s eye, mid 1980s to mid 2000s was the fiat golden age, lol) superior to gold, but White correctly hammers him. Sumner drones on about his ‘ideal’ fiat system (shut up please…are you the subject of the interview or White?) White at 6:00 says central banks meddle, aren’t mechanical, while gold standard does not need a central bank (less overhead), free banking possible (paging George Selgin!). White says @7:24 that velocity shocks are profitable for free banks (good point) so gold system self regulating from a monetarist point of view. Sumner at 7:55 claims you need an international gold standard but White correctly says the USA or EU adopting gold would de facto sway the world. White correctly says the gold standard worked (Sumner doesn’t plug his or Eichengreen’s book to the contrary, thank goodness, or maybe they edited that part out). Sumner @8:40 claims his ‘ideal’ fiat money system is better (in Sumner’s mind) than the proven 19th c gold standard. White is skeptical, correctly.

    Verdict: White wins; not even close.

  3. Gravatar of Joe C Joe C
    20. December 2016 at 13:02

    Am I mistaken – haven’t we had more recessions during gold years than fiat years?

    The length of time between recessions has increased since 1971.

    From 1879 to 1933 under the gold standard there were 15 recessions in 54 years – 3.6 years per recession. From 1971 to 2016 we have had 6 recessions in 45 years or one every 7.5 years. This is according to NBER recession dates.

  4. Gravatar of Jerry Brown Jerry Brown
    20. December 2016 at 13:35

    Nice video – thanks for posting it.

    Here is some additional support for Sumner’s points courtesy of Mark Thoma’s blog links.

    Stephan Cecchetti and Kermit Schoenholtz argue that “both inflation and economic growth were more volatile under the gold standard.” And that financial crises were more frequent also.

  5. Gravatar of ssumner ssumner
    20. December 2016 at 14:08

    Thanks Kevin.

    Ray, That’s what I thought too.

    Joe, Recessions were more frequent under the gold standard, although so many things have changed that it’s hard to draw any conclusions from the data.

    Thanks Jerry.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. December 2016 at 14:25

    Enjoyed the video, but I thought you were not hard enough on the problem that the interwar system was, in fact, a natural progression. Creating the Fed meant that a few central banks dominated gold holdings and therefore controlled the price of gold. You make gold central, and governments will concentrate their efforts on controlling gold.

    Moreover, I would argue that bimetallism actually worked better than the gold standard. Unfortunately, moving from bimetallism to gold was also natural as access to whatever the dominant currency and financing market had clear value.

  7. Gravatar of ssumner ssumner
    20. December 2016 at 14:29

    Lorenzo, Good points.

  8. Gravatar of Ray Lopez Ray Lopez
    20. December 2016 at 14:49

    Sumner: “Ray, That’s what I thought too” -??? Sumner mystery writing continues…I am guessing, vain as Sumner is, he’s talking about his youthful looks.

    @Joe C & Jerry Brown – while it’s true that recessions/panics were more frequent in the 19th century in the USA/UK than now, it’s also true that GDP per capita growth was about the same as now (see A. Maddison’s data). So the conclusion is that there was more ‘creative destruction’ back then: short violent downswings followed by sharp upswing recoveries. Think of 2008/9 in the US stock market. That’s a sign of health IMO. Would you rather have a car crash or cancer? With today’s ‘shock absorbers’ where people work for six months then go on unemployment / welfare for six months, there’s less dynamism, more preservation of the status quo (one reason existing corporations are so powerful). That said, if Tyler Cowen’s Great Stagnation thesis is correct, we really cannot short term increase GDP so perhaps welfare / govt charity is the fate of most Americans.

  9. Gravatar of dw dw
    20. December 2016 at 14:53

    and back on the gold standard, wasnt most of world on it before the great depression? and werent depressions more frequent? and the longest happened on the gold standard?

  10. Gravatar of Ray Lopez Ray Lopez
    20. December 2016 at 15:00

    @dw – you missed my post. Back in the days, the 19C, depressions and recessions were indeed more frequent but the rebound was more robust, and per capita growth was the same (or better). It’s the area under the curve that counts, if you know calculus. See A. Maddison’s data (to 1991 but if anything it’s worse for the 20th century now). As for the Great Depression, our host in his last book correctly claims IMO that the Great Depression lasted until 1934, when the USA went off the gold standard. After that, with a devalued dollar, the depression lasted longer due to failed FDR policies. And Bretton Woods was essentially a gold standard of sorts, with the US dollar being ‘gold’ (and backed by Ft. Knox gold), until the early 1970s.

  11. Gravatar of Gordon Gordon
    20. December 2016 at 15:02

    Larry White seemed to be placing any blame for problems under the gold standard on central banks. Yet, China’s depression in the 1930s was due to US legislation on silver prices and had nothing to do with central bank policy mistakes as far as I’m aware. Also, isn’t the Eurozone a troubling example of what can happen when the price-specie flow mechanism meets up with price stickiness? Granted the Eurozone crisis involved a fiat currency but I recall that Lars Christensen once said that the euro caused problems because it brought about conditions similar to being on the gold standard.

  12. Gravatar of Jerry Brown Jerry Brown
    20. December 2016 at 15:18

    Ray, I think I would like to avoid both car crashes and cancer thank you. And in an economic sense, I would say that a fiat money increases the chances of avoiding either because it allows more policy flexibility than a strict gold standard will. But of course bad policy under either fiat money or a gold standard will get you bad results. The point is that the gold standard did nothing to prevent bad policy from happening. And maybe it increased the likelihood of it.

  13. Gravatar of dw dw
    20. December 2016 at 17:37

    ray, rebounds werent always that fast, otherwise the original great depression wouldnt be now called the longest depression (seems it ran for about 20+ years before recovery happened). and ddnt we g back on to the gold standard after the great depression, up until Nixon took us off of it? and wasnt one of the problems that England had that made their economic problems during the great depression even worse? course it seems that we have had problems with using any thing as money, gold, tulips, etc have all done in economies before

  14. Gravatar of Kenneth Duda Kenneth Duda
    20. December 2016 at 17:43

    Scott, I understand what you’re taking about when you say “a well-run fiat-money system.” Do you know (or can anyone explain) what White is talking about when he talks about a well-run commodity-money system? He concedes that central banks can completely ruin a commodity-money system e.g. gold hoarding during the great depression, but he never articulates the alternative. Is it free banking?

    (I have never understood free banking, because I can’t see how market forces create the right incentives for private currency issuers to adjust the monetary base in a way that leads to NGDP stability.)

  15. Gravatar of Matthew Waters Matthew Waters
    20. December 2016 at 20:09

    Larry is wrong that 50-year and 100-year bonds haven’t been issued. Spain has issued 50-year bonds recently. Companies have issued 100-year bonds.

    The US could probably issue 100-year bonds if it really wanted to.

    On the surface level, Larry’s main argument strikes me as silly. His idea is the role of currency is price stability. Wouldn’t central banks do better on that through targeting a basket of all prices rather than a single price (gold)?

    To me, Larry is really trying to find a system which is somehow insulated from government malfeasance. For various reasons, no system could be perfectly insulated from bad actors in government.

  16. Gravatar of Jerry Brown Jerry Brown
    20. December 2016 at 20:46

    There is another thing about the gold standard that gold enthusiasts always seem to forget. And that is that leaving the gold standard is always an option for any sovereign nation at any time. That option has been exercised many, many times in the past. There really is no way to bind future policy to what is decided in the present- especially in any sort of democracy. So what is the point of going back to one?

  17. Gravatar of Ray Lopez Ray Lopez
    20. December 2016 at 20:51

    Seems a lot of posters think NGDP ‘stability’ is so important (Duda: “I have never understood free banking, because I can’t see how market forces create the right incentives for private currency issuers to adjust the monetary base in a way that leads to NGDP stability”). Just ask why NGDP stability is important to a private bank? A private bank cares about profit: money lent out and received from borrowers should be, after inflation, greater than money given to depositors. Money In – Money Out. NGDP stability per se has nothing to do with anything. A risk taker like Duda should understand something so basic, but he doesn’t. Then again he gives money to Sumner so I wonder about him sometimes.

    @Jerry Brown- I see the monetarism bug has bit you. Pity. @dw – just Google GDP/capita and check the results yourself. late 19th C = late 20th century, and yes, you are correct: the Bretton Woods post WWII era, which had phenomenal growth, was essentially a sort of USD gold standard set up by Keynes. Would not hurt to go back to that standard (and fixed exchange rates) as Steve Forbes has preached. Rest of your points about England etc not clear.

  18. Gravatar of Jerry Brown Jerry Brown
    20. December 2016 at 21:55

    Ray, you should know by now that I am not much of a monetarist, even though I like Sumner’s idea of NGDPLT. You don’t need to be a monetarist to support NGDPLT, nor do you need to subscribe to monetarism to think a gold standard is the wrong policy. You might need to be a monetarist to think that the name “NGDPLT” is a good name for policy you advocate though. Not sure about that.

  19. Gravatar of Dan W. Dan W.
    21. December 2016 at 05:01

    A decrease in volatility enables greater leverage of assets which will lead to higher prices. Higher prices based on real value are fine. Higher prices based on imagination are not. Yet imagination promotes mispricing in two ways. It can lead buyers to be overconfident both in their demand for a good and their ability to afford that good. It can also lead lenders to be overconfident that borrowers will be able to pay their debts.

    Programs like NGDPLT can decrease volatility. But the risk remains and always will that overconfidence in low volatility will lead buyers and lenders to imagine prices that are simply not real. Ultimately the problem with national efforts to manage price levels is the outcome of a corrupt financial system where profits are captured by private institutions but losses are “insured” by the public.

  20. Gravatar of flow5 flow5
    21. December 2016 at 07:59

    An operating gold standard creates, or is associated with, many advantages: stable foreign exchange rates; free multilateral clearing of currencies among nations; the maximization of multilateral foreign trade; and relatively stable price levels – no chronic inflation.

    All that is required to achieve this economic utopia is a world free of major wars, depressions and cartels; markets with downward price flexibility that is, true price completion; creditor nations which impose no significant restraints on imports; monetary authorities who abide by the “rules of the game”, i.e., the central banks expand credit (create commercial bank legal reserves ) when gold stocks expand, and vice versa; monetary authorities who restrict the expansion and contraction of central bank credit within a very narrow range, thus preventing the commercial banks from creating an unsupportable volume of credit money; and finally a world where reserve currency countries (countries whose currency serves as a store and standard of value as well as a transitions currency) never operate with chronic deficits in their balance of payments.

    Note: deficits or surpluses refer to changes in a country’s gold stocks and net short terms claims (bank deposits), the “balancing items’ in the balance of payments. Deficits result from gold exports and/or a decreases in short-term claims against foreigners relative to the short-term claims held by foreigners vice versa for surpluses.

  21. Gravatar of ssumner ssumner
    21. December 2016 at 08:23

    dw, Yes, most of the developed world was on the gold standard in 1929. There is some debate about the stability of the economy during the gold standard period. In my view NGDP was more unstable back then, but the data is rather vague.

    Gordon. The eurozone is exactly the sort of thing I worry about if there were a return to the gold standard.

    Ken, By “well run”, Larry means something without intervention by central banks, and perhaps also with a system of free banking. He points to central bank intervention as creating problems during the interwar period, with some justification.

    In other words, something closer to the pre-WWI system.

    Matthew, Thanks for that info. Keep in mind that a debate makes views seem less nuanced than they really are. Larry understands that there are some potential problems with re-introducing the gold standard into the modern world. I think it’s better to view him as suggesting that the pre-WWI system has gotten an unjustifiably bad reputation.

    Jerry, I agree.

  22. Gravatar of Kenneth Duda Kenneth Duda
    21. December 2016 at 09:27

    Okay, maybe I am finally understanding. *No one* imagines free banking leads to NGDP stability. Plutocrats like free banking because ensuring the real return on money lending is more important than social concerns. Knee-jerk libertarians like free banking because Freedom (i.e. resentment of any and all government power). My confidence that I’m backing the right horse here just went up. Fiat money plus NGDPLT is the obvious winner.

    Income stability is more important than price level stability for everyone besides very wealthy money lenders. Why isn’t that obvious? Guaranteeing individual incomes doesn’t work for incentive reasons, but at least the Fed should guarantee aggregate (nominal) incomes, so those who do work hard and make reasonable decisions can find financial stability. Try being broke, homeless and unemployed, along with 10% of American workers!, and tell me how glad you are that the Fed is guaranteeing the price level at all cost. But it’s not just better for the poor. Try being an entrepreneur selling networking equipment, and finding out that Verizon and AT&T are canceling all of their infrastructure orders for 2008 because cell phone sales are down because their marginal customer can’t find a job and is canceling cell service. My last five years of investment and hard work are going down the drain, but it’s worth it, because without iron-clad price level stability, Ray Lopez’s bond portfolio might have lost a few percent of its value to inflation, and Larry White would experience lots of undesirable resentment about government having the power instead of him.

    Your theories tell you that when there is an increased demand to hold money, the price level comes down and everyone keeps their job and their business, just at a lower price level. Your theories are wrong. When there’s a shock to money demand, businesses lose their customers and workers lose their jobs. It takes years for the price level to come down. It’s called “nominal rigidity”. As a business owner, I can deal easily with a little inflation, because I can pass supplier and employment price increases on to customers. But the other way around doesn’t work; I can’t just cut everyone’s salary and renegotiate all of my long-term supply contracts every time I see softness in demand. I cut back production instead, leading to a vicious cycle == depression.

    Flows are more important than the price level for almost everyone. And that’s why NGDPLT is better than inflation targeting. And it matters. That’s why I’m supporting it, even though at this point in my life, it’s not in my self interest to do so. It’s easy to see I’m personally better off with the right-wing formula of hard money and tax cuts for the wealthy. I guess that’s why some people say I commit an error in judgment in supporting NGDPLT. Obviously, the only reason to support something that’s not in one’s own self interest is bad judgment. What other possibility could there be? Ayn Rand proved that altruism is a fraud and selfishness is a virtue, after all.

    Legal disclaimer: the foregoing includes sarcasm. The intended meaning of the statements above may not match the literal meaning.

  23. Gravatar of Carl Carl
    21. December 2016 at 10:03

    “In my view NGDP was more unstable back [during the gold standard period], but the data is rather vague.”
    Which indicators do you rely on primarily to draw your conclusion?

    As for the debate: I enjoyed it but thought it too short. I’d have liked some more discussion on the feasibility of getting central banks to follow monetary policy rules like NGDPLT vs getting the government to rely on the gold standard (or bimetallism as Lorenzo reminds). Which one is less likely to be corrupted and why? As it stands, a cursory summary of the debate might be that Larry pointed to 100 years of stability under the gold standard and you only pointed to 20 under a fiat monetary system.

  24. Gravatar of flow5 flow5
    21. December 2016 at 11:09

    Alan Greenspan had an excellent article “Can the U.S. Return to the Gold Standard” in the WSJ on 9/1/1981.

    Essentially, what people don’t understand, is that our protracted trade deficits would have to cease for unrestricted convertibility (and that means our being the world’s policeman).

  25. Gravatar of flow5 flow5
    21. December 2016 at 12:24

    The last vestige of legal reserve and reserve ratio requirements against the Federal Reserve Note, demand deposit, and inter-banks demand deposit liabilities of the Reserve banks was eliminated in 1968. Today the Federal Reserve Note has no legal reserve requirements, and the capacity of the Fed to create IBDDs has no legal limit.

    These IBDDs are owned by commercial banks; they are bank gratis reserves and can be converted dollar-for-dollar into Federal Reserve notes. The volume of IBDDs is almost exclusively related to the volume of Reserve Bank credit. When Federal Reserve Banks expand credit, for example by buying U.S. obligations, the balance sheets of the Banks reflect an increase in earning assets and an equal increase in IBDD liabilities, i.e., gratis reserves.

    Actually the issuance of Federal Reserve Notes is deflationary, other things being equal, since the issuance diminishes the clearing balances and-gratis reserves of the commercial banks. The Fed recognizes this fact and uses its open market power to replenish bank free reserves and prevent any unwarranted contraction of bank credit.

    The last legal link to gold (prior to the “gold cover” bill of March 19, 1968), was fictional, the economic tie tenuous, & its protection was a myth.

    In March 1968, the U.S. Treasury ceased to sell gold (@ $35 / oz.) on the London exchange. But the privilege of buying our gold at the $35 price was not denied the central banks of “friendly” countries until 1970. The Bank of France, especially, did not value the friendship to the extent that it refrained from plundering our gold stocks.

    By mid-1970, our gold stocks @ $35 / oz. had fallen from approximately $25b in 1950 to $10b. It was then that the dollar ceased to be “as good as gold”. Nixon’s two subsequent devaluations of the dollar to the contrary notwithstanding.

    The dollar was severed from gold because of the Military Industrial Complex. The U.S. had a net liquidity deficit in every year since 1950 (with the exception of 1957), up to 1976 (when the private sector contributed its first trade deficit). These deficits were entirely the consequence of excessive U.S. government (Pentagon’s) unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases, operations, & personnel). Our communist containment deficit.

    During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’état to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

  26. Gravatar of ssumner ssumner
    21. December 2016 at 12:35

    Ken, I would add that free banking is not necessarily in conflict to NGDP targeting, it all depends on what one means by free banking. (See George Selgin’s work)
    In my view, if we stabilized NGDP growth, then there would be less regulation of banking, because people would not longer worry that banking instability could tank the economy.

  27. Gravatar of ssumner ssumner
    21. December 2016 at 12:40

    Carl, I would look at indicators like the WPI and industrial production. Gordon and Balke have very crude estimates of NGDP.

    The economy today is so different from the economy back then that it’s hard to draw any conclusions.

    I don’t think the gold standard of the 19th century would work in today’s economy, where wages and prices are far stickier. The eurozone is a prefect example of what happens when you lose monetary policy flexibility.

  28. Gravatar of Kenneth Duda Kenneth Duda
    21. December 2016 at 13:34

    Scott, I don’t understand how to harmonize free banking with NGDPLT. If money is commodity backed, what steering wheel does the Fed use to pursue its NGDP target? I’ve read a bunch of what George has written; can you point me to something in particular?

    I certainly agree that under NGDPLT, there’d be a lot less need to regulate banks because there’d be greatly reduced consequences of bank failure, so in a broad sense, NGDPLT can result in a significant increase in freedom compared to today.

  29. Gravatar of Ray Lopez Ray Lopez
    21. December 2016 at 17:38

    @Kenneth Duda- keep drinking the Kool-Aid, seems you believe that somehow the Fed can presently steer NGDP (they cannot, not enough money printing to do that, as the $3T they printed since 2008 to no effect shows that). What Sumner is proposing with NGDPLT *might* be able to ‘steer NGDP’ if you take Sumner literally and require the Fed to ‘print money at all costs until NGDP hits its target’. But that might also cause hyperinflation. As for me and my money: we made ours with DC real estate. We are landlords, not bond holders. We, like you, like inflation as we pass costs to the customer, for us the tenant (DC is a landlords market, though it’s gotten tougher to make money the last 10 years, as more people are renting out their basement to make a little extra money). Plus inflation causes price appreciation of real estate. On our cash we get a measly 1% just like anybody else, just play money even when it’s for a couple of million dollars.

  30. Gravatar of Kenneth Duda Kenneth Duda
    21. December 2016 at 19:46

    I see, now it’s clear. The fed can pick between insufficient spending or hyperinflation., but It’s fundamentally impossible to hit a level of spending in between.

    I don’t know why you think I like inflation. Stable prices are fine with me. What really matters to the economy (and hence to me) is stable incomes. If we’ve got stable spending, then we’re doing well. Whether that comes with inflation or deflation seems secondary, at least from a monetary policy perspective.

  31. Gravatar of Ray Lopez Ray Lopez
    21. December 2016 at 20:54

    @Ken Duda: “I see, now it’s clear. The fed can pick between insufficient spending or hyperinflation., but It’s fundamentally impossible to hit a level of spending in between.” – exactly. Look at the Fed since 2008. Look at Japan since 1990. Probably a few other countries too. No central bank has ‘gotten it right’, it’s like pushing on a string. Sumner claims his formula works, NGDPLT aka money printing pedal to the medal Ben Cole style until the futures market says to stop, but this is just a thought experiment that works in the mind of the believer. It’s like Marxism: the Marxists claim it’s scientific, but in practice their method has never been shown to work, ever. And every time, say the Marxists, people in practice (USSR, China, Vietnam, etc) get communism wrong, just like Sumner always claims the Fed gets it wrong (except for the stable years when the economy was fine). It’s a backwards looking tautology to think like that; not scientific.

    That said, I doubt NGDPLT works any better (or worse) than the Taylor rule or Friedman’s mechanical 3%/yr formula, since I think, like Fisher Black, that money is largely neutral (except during hyperinflation). So it’s worth a try, within limits (Sumner’s pedal to the medal scares me however).

    As for stable incomes, you’re assuming a conclusion that the Fed can manage demand by hitting a NGDP target printing money. This Keynesian mindset went out with ‘fine-tuning’ in the 1960s. By analogy, income stabilizers aka ‘welfare’, ‘UE’, etc have been shown largely to be nothing more than sops. Why should NGDPLT via sticky prices/wages and money illusion be much different than these failed policies?

  32. Gravatar of George Selgin George Selgin
    22. December 2016 at 06:33

    Joe C., the NBER recession dates for the 19th century have long been doubted by economic historians. Also, U.S. recessions then were a result of many factors, and cannot simply be attributed to “the gold standard.” For details see my paper, “Has the Fed Been a Failure?” with Bill Lastrapes and Larry White.

  33. Gravatar of George Selgin George Selgin
    22. December 2016 at 06:46

    Ken Duda writes, “I have never understood free banking, because I can’t see how market forces create the right incentives for private currency issuers to adjust the monetary base in a way that leads to NGDP stability.”

    Imagine someone writing, “I have never understood why NGDP targeting is conducive to macroeconomic stability,” as if oodles of stuff weren’t availabe explaining the point, and you can imagine how I feel about your comment. I have written an entire book about this, which is available online (The Theory of Free Banking), not to mention many articles and blog posts.

    For starters, free banks don’t issue base money. Only central banks do that. Like ordinary banks today they issue redeemable base-money substitutes. It is the money multiplier and not the base that tends to adjust to offset velocity changes, and thereby smooth spending, under free banking.

    I wish that Market Monetarists would put the same effort into understanding free banking that they would like to see others put into understanding their own arguments.

  34. Gravatar of ssumner ssumner
    22. December 2016 at 07:56

    Thanks George, And just to be clear, I do understand the arguments you make here, and I’m a “market monetarist”.


  35. Gravatar of Art Deco Art Deco
    22. December 2016 at 10:03

    (and that means our being the world’s policeman).

    ‘World’s policeman’ is a bit of seedy rhetorical gamesmanship. Annual expenditures on Iraq and Afghanistan ran to about 1% of gross domestic product. Military expenditures since 1945 have generally bounced around a set point of 6.7% of gross domestic product, with 30% of American personnel stationed abroad.

  36. Gravatar of George Selgin George Selgin
    22. December 2016 at 12:44

    Yes, you’re OK on that score, Scott. Though I would rather you were a FB enthusiast! Alas, it would probably hurt MM at least as much as it helps FB.

    I liked the “duel” a lot. Wish they’d let me do one!

  37. Gravatar of ssumner ssumner
    22. December 2016 at 14:09

    George, You’d be an excellent Econ Duel participant, as you are very good at public speaking.

    On free banking, if we can get NGDP level targeting, then I’m all for 100% deregulating banking. Even now I’d prefer a minimal level of regulation, say capital requirements.

  38. Gravatar of George Selgin George Selgin
    22. December 2016 at 15:11

    Even with the crappy discretionary system in place, but minus Fed bailouts (for those are contrary to it), genuinely free banking would be desirable, as it would mean fewer financial meltdowns. That’s something all rule advocates must be concerned about, because crises pose a challenge for any rule-based regime: people will blame any meltdown that occurs under an established rule, if one exists,on the rule, whether it deserves it or not. Thus the frequent assertions, all of them quite unfounded,to the effect that the the gold standard was to blame for pre-Fed U.S. financial crises. Get NGDP level targeting in place today, and, if a crisis happens for any reason, people will blame the rule. Certainly all advocates of monetary discretion will not hesitate to do so.

    Anyway, I appreciate that you are not at all opposed to free banking, and that you recognize it as complementary to NGDP targeting. Like you and Larry in the video, they make a good pair!

    As for my ever doing an Econ Duel, I doubt it will ever happen. Since my move to Cato, I’ve been lucky to get the MR team to so much as mention my name! Not sure what that’s all about.

  39. Gravatar of George Selgin George Selgin
    22. December 2016 at 15:20

    @Jerry Brown: governments certainly can treat the gold standard as a ,ere “scrap of paper” once they have set-up a central bank to administer it, for such banks end enjoying sovereign immunity. The gold standard then becomes just another unreliable fixed exchange rate commitment. This is yet another instance where the difference Larry insisted upon between a free banking gold standard and a central bank version matters very much. Imagine a commercial bank today declaring to its customers that it is going to “devalue” its deposits (“Sorry, sir, but your former $5000 balance is now worth just $2500”), and get away with it. Well, gold-based note issuing free banks couldn’t get away with it, either. Blaming the gold standard for the fact that central banks can’t be relied upon to honor it (and favoring for that reason what is in fact nothing but an “already broken promise” standard instead) misses the point entirely.

  40. Gravatar of George Selgin George Selgin
    22. December 2016 at 15:21

    for “end” read “end up.”

  41. Gravatar of Jerry Brown Jerry Brown
    22. December 2016 at 23:52

    George Selgin, I am not familiar with the free banking gold standard theory and will try to learn about it before responding to your comment.

  42. Gravatar of George Selgin George Selgin
    23. December 2016 at 07:02

    Jerry,if you can access it, this paper has the most detailed treatment of the subject:

    I also discuss the issue in my own recent podcast on the gold standard:

  43. Gravatar of ssumner ssumner
    23. December 2016 at 08:28

    George, Get rid of Fed bailouts and FDIC.

  44. Gravatar of Jerry Brown Jerry Brown
    23. December 2016 at 10:50

    George Selgin, thank you for the link to the podcast, which I listened to and enjoyed. And mostly agreed with- to the point where I do not see why you would have any exceptions to the comments I wrote on this particular blog post. The paper however seems to require $35 to access which is more than I choose to devote at this time for my education on this subject, even assuming that fiat money would be acceptable for the exchange :). Thanks though- it was an interesting podcast.

  45. Gravatar of George Selgin George Selgin
    23. December 2016 at 15:16

    Believe me, Scott, I’m working on it 🙂 I think you saw my paper on Flexible Open-Market Operations, offering those as an alternative to any sort of Fed direct lending, emergency or otherwise.

    And I are that guarantees are these days THE most destructive of all departures from a free-banking ideal.

  46. Gravatar of George Selgin George Selgin
    23. December 2016 at 15:18

    Jerry, I didn’t mean to suggest that we disagreed much. I merely wishes to suggest that some gold standard arrangements are more robust than others–that is, that it isn’t always easy for governments to just toss them aside whenever they like.

    Concerning my paper, if you will write to me at, I will be happy to send you a pdf.

  47. Gravatar of Jeff Jeff
    24. December 2016 at 14:02

    A question for the free banking advocates: Why is it that no country in modern times has a free banking system? Some systems in the past came pretty close to free banking, but every country that had such a system has now abandoned it. Are they all stupid? I think if you want to convince us that free banking is a good thing, you are going to have to tell us why it disappeared.

    As for a gold standard, the idea that you can have both a gold standard and central banks with the latter never interfering with the former seems pretty naive. Given that central banks are not going away, how can you have a gold standard without the kind of gold hoarding by the French and American central banks that turned a recession into the Great Depression? Something like Irving Fisher’s Compensated Dollar scheme is needed to keep the central banks from screwing it up.

  48. Gravatar of George Selgin George Selgin
    24. December 2016 at 18:47

    Jeff, if the argument that “no country does X, so X can’t be any good” were valid, it would condemn many sound reform ideas–including every sort of monetary rule. Fisher’s scheme, for one, has never been tried. Does that suggest to you, as it might well do according to your own logic, that it lacks even the stamina of free banking, which has at least been embraced by quite a few countries at one time or another? And do you really suppose that mere appeal to its having been done away with trumps looking into what actually happened? Well,I gotta admit, it sure is easier than messing around with actual facts!

    In any event, Larry White and I have answered your question, in an Economic Inquiry article called “A Fiscal Theory of Governments’ Role in Money.” The short answer is that central banking and fiat money are fiscally advantageous, even though they produce inferior monetary outcomes.

    No one has stressed the long-run incompatibility of a gold standard with central banking any more than free bankers have, so that is an odd point to raise against us.

    Finally, free banking is itself not necessarily bound-up with a gold standard. I have not endorsed a return to gold in my writings, though I do see the merit of reforms that would take us in the direction of free banking. If you doubt this, go ahead and see if you can find me advocating a return to gold anywhere.

    It isn’t the fault of free bankers that people attribute naive beliefs to them instead of inquiring into what they have actually had to say in their writings. We don’t assume that everyone else is stupid; but we do wish others would resist making that same assumption about us! Every now and then, a minority position has merit; and every new idea starts out as a minority position.

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