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Some Links (One Golden)

1. With all the recent talk, much of it poorly informed, about the gold standard, I decided to post on SSRN a draft of my paper, "The Rise and Fall of the Gold Standard in the United States," written for an upcoming Hillsdale College Forum.

2. I'm asked, "What is Free Banking?," among other things, at an interview conducted at Guatemala's Francisco Marroquin University in the course of a celebration there last month of Milton Friedman's 100th birthday.

3. "Has the Fed Been a Failure?," in which Bill Lastrapes, Larry White and I do not find much reason to celebrate the approach of the Fed's 100th birthday, has been published online by the Journal of Macroeconomics (full view requires subscription).

  • Bill Stepp

    Was the first Coinage Act establishing the 15:1 ratio the first (pre-Nixonian) price control

    • It was clearly a price control, but I believe this ratio reflected exchange rates common at the time.

      I suppose import tariffs are also price controls, so I wouldn't call this one the first.

      The Act also authorized copper coins without specifying the purity of the copper or entitling people to present copper for coinage at no cost or recognizing other copper coins as legal tender (whereas Spanish silver for example remained legal tender). Was this copper coinage also a price control, or was it the issuance of a fiat currency?

      The Congress eventually ceased recognizing Spanish coins as legal tender and also ceased coining silver on demand. Since silver was the more common currency, why didn't Congress instead deregulate the value of gold in dollars when the 15:1 ratio became economically irrational? Why did it instead retroactively change the terms of dollar denominated contracts?

  • Very interesting and edifying. Thanks Professor Selgin!

  • In the interview, you say that historical free banks under a gold standard settled their accounts with other banks daily, i.e. if bank A received bank B's note from a depositor on a given day (and bank B received no note issued by bank A on the same day), then bank A settled with bank B at the of the day.

    My question involves the meaning of "settled". Did bank A necessarily demand redemption in gold at this point, or might bank A have settled for another asset, like all or part of a debt owed to bank B (or a debt owed to bank A by bank B)? I suppose the latter must have been the usual settlement. Was it not? If banks only settled for gold under these circumstances, while people routinely deposited notes received in banks other than the issuing bank, I can't imagine banks generally having 100 to 1 reserve ratios, as you say Scottish banks did. On the other hand, if banks settled for other assets, I can easily imagine this ratio.

  • vikingvista

    Regarding #1,

    Although you explain why the gold exchange standard and Bretton Woods arrangement were unstable, you also are saying that attempt at a future gold standard or even a future free banking gold standard would be unstable, since they could not last without unanimous cooperation among nation states to either adhere to it, or devolve their authorities so as to allow it.

    So my question then, is what monetary system *is* stable? The current one? Is there no system whereby a single nation state can alone stably defy what other nations are doing? Must any monetary system be either universal or doomed to fail? Or are all monetary systems simply doomed to fail, thus making long term stability unachievable?

    Or, do you think that if the unlikely and unstable *attempt* at universal acceptance of a different system were somehow achieved, such a system might be stable against defectors?

    I see your paper as support for the notion of the general existential instability of free markets and stability of statism.

  • MichaelM

    vikingvista: The system whereby a single nation state can alone stably defy what other nations are doing is called 'autarky'.

    In reality, nation-state borders are a speed-bump in a global economy, not demarcations of 'national' economies. This was always true, the world never really consisted of North Koreas. Thus, any time a single nation-state were to de-nationalize its currency that currency, while not itself a SOURCE of instability, would still be vulnerable to instability from abroad. Even though the US did not have free banking in the late 19th century, the contemporary US economy was, for instance, vulnerable to adverse monetary policy on the part of the Bank of England. Any time England tightened, US exports dropped, cascading through the US economy as if the US had itself had a monetary authority capable of contractionary policy.

    From a pragmatic point of view this does make establishing a stable free monetary system difficult. You either refuse to interact with the global economy or you accept the occasional monetary shock from adverse monetary policy elsewhere. However, if you take the research of the scholars who post on this blog seriously, a free monetary system would be MORE capable of absorbing such shocks. Centralized monetary policy is slow and lacking in much of the important information necessary to react to adverse foreign monetary policy productively while the natural incentives of the free system should lead to relatively quick adjustment to the new international monetary situation.

    • vikingvista

      "The system whereby a single nation state can alone stably defy what other nations are doing is called 'autarky'."

      I'm speaking of one thing–the existence of a different monetary system. While autarky, if possible at all, would entail the former, to say that the former entails autarky is to deny the possibility of any regional differences absent autarky. But that is demonstrably false.

      That the peoples under different nation states can interact and influence one another even when those nations have long-standing stably different policies *of some sort*, I didn't think would be denied by anyone. But what Selgin suggests with his last two paragraphs is that going forward from today's state of affairs, we can probably exclude from the set of such stably differing policies both a central bank gold standard, and a free banking gold standard.

      This is not to say that Selgin hasn't been persuasive in his other writings that free banking *could* be more stable than today's system if it were possible to coordinate all nations into simultaneously agreeing to enact policies to permit it. But in this paper, he argues that it is an unstable system BECAUSE it is unlikely to survive defectors in the world.

      Anti-statists (among which I count Selgin) sometimes do believe some systems of liberty could be stable *and* unilateral. The most frequently defended is unilateral free trade. That is not to say they don't think special interests would exert political pressure against unilateral free trade, but only that the process of trade itself would not undermine such a policy.

      The reason I ask, is because for any system to be taken seriously as a future outcome, it seems that it would need to be at least *tenable* unilaterally going forward from today. Certainly nobody is going to expend political capital on an idea whose most knowledgeable and strongest defenders believe will collapse in the face of a single major defector on the world stage–a prospect which implies the defecting system is in fact the more stable one. It condemns free banking to an interesting bit of history, a correction of the historical and semantic errors of others, and nothing more.

  • … the basic monetary unit is a specific weight of gold …

    I suggest another formulation. The basic unit of monetary value is the value of a specific weight of gold.

    Coins in that case will command a premium above their bullion value representing the total coinage fee, …

    This premium reflects the difference in the subjective value of coin vs. bullion, not the cost of coinage. This distinction is particularly significant when the coin is legal tender and the bullion is not, more so if coinage is not "free" in the sense that you describe. Silver coins have been legal tender in the U.S. while coinage was not free.

    … the monetary unit can be understood to stand either for the weight of fine gold …

    A gold standard fixes the nominal value of this gold, and all other prices are measured relative to this fixed, nominal value. Gold still has a variable, subjective, market value, but we only see the variation in other prices. A decrease in the market value of gold appears as inflation (generally rising prices), and an increase in this value appears as deflation.

    Under a gold standard prices, not "values,” are expressed in gold units, and those prices themselves reveal nothing more than that sellers of goods value the gold in question more than the goods they are prepared to exchange for it.

    A price in gold measures the value of the priced good relative to the value of gold. When you say that a seller, pricing a good at one ounce of gold, values an ounce of gold more than the good, you say the same thing.

    Nor is the existence of a gold standard a matter of gold coins having legal tender status.

    A gold standard can exist with or without gold as a legal tender. The legal tender status is the problem. The problem exists even if exclusive, legal tender status applies only to public debts (like subjects' obligation to pay taxes and the state's obligation to pay tax revenue to persons entitled to receive it).

    … the Federal government, which was ultimately responsible for the establishment of the gold standard in the U.S., never made any sort of money legal tender until 1862, when it conferred that status, not upon gold, but upon greenbacks.

    Section 2 of the Coinage Act of 1857 states, "… all former acts authorizing the currency of foreign gold or silver coins, and declaring the same a legal tender in payment of debts, are hereby repealed …"

    Why does this act refer to "former acts … declaring the same a legal tender".

  • The treatment of the gold standard as a standard of value invites the mistaken conclusion that, insofar as its presence does not rule out variations in the general level of prices, such a standard must be “inaccurate” and therefore faulty (e.g. Morgan-Webb 1934, p. 5).

    Gold prices are not "inaccurate" or "faulty". They're only relative to the value of gold. "Standard of value" only means that prices are relative to the value of gold, reflecting how much people value other things compared with gold.

    Given any system of market prices, one can determine the value of a good relative to the value of an ounce of gold by dividing the good's price by the price of an ounce of gold. This ratio tells me how much gold I could buy with the same money, effectively how much gold I forgo by purchasing the good instead.

    If an ounce of gold itself is the standard of value, a market price is already this ratio, because the price of an ounce of gold is 1 by definition. "Standard of value" means nothing else to me.

    Because gold is scarce, durable and has inelastic supply, demand for gold is subject to a feedback loop associated with speculative bubbles, more so when it is used as money and still more so when it is a legal tender. According to Daron Acemoglu, an economist at MIT, "Gold is intrinsically close to useless, so its price is determined as a 'bubble'."

    I don't necessarily agree with the economists surveyed here, but they largely agree with each other.

    When prices measure people's subjective valuation of gold compared to other goods, swings in the demand for gold affect all other prices.

    Swings in the dollar price of gold affect the ratio of other dollar prices to the dollar price of gold.

    The last two statements are equivalent.

    Swings in the price of all goods affect the stability of contracts.

    Gold standard prices are completely equivalent to prices measured relative to any other standard (one set of prices implies the other set), but if Acemoglu is correct, gold standard prices are less stable than other prices, so they adversely affect the stability of contracts specifying prices. That's the argument in a nutshell. You call it a "valid question", but I haven't read your answer yet.

  • … the value of such coins, which are necessarily coined not freely but on the government’s own initiative, derives either from direct limitation of their quantity or from their also being made freely redeemable in full-bodied coin.

    Hair with my DNA is limited in quantity and also freely convertible to gold, but for some reason, people won't exchange much gold for my hair. I can get a little gold for it but not a lot.

    The government's money has value for other reasons. I need it to pay taxes for example. I need it to buy my liberty from the state, and my liberty from the state is very valuable to me. Fiat monies predominate for no other reason.

    A genuine gold standard must, nevertheless, provide for some actual gold coins if paper currency is to be readily converted into metal even by persons possessing relatively small quantities of the former.

    Under a genuine gold standard (in my way of thinking), the value of gold is not the value of my liberty from the state. Gold still has value, including its value as a medium of exchange, and prices reflect the market value of other goods relative to the value of gold, but these prices do not reflect the value of other goods relative to the value of liberty from the state and its agents in a monopolistic, credit oligarchy.

    A genuine gold standard, in this sense, requires some actual gold held by banks in reserve. For a statutory gold standard, this amount of gold is different.

    Equally misleading is the claim that a gold standard is an instance of government price fixing.

    Only relative prices are meaningful, and a gold standard does not fix relative prices. It only assigns a standard value to the price of one good.

    The predictable result was, not an operational bimetallic standard, but a switch from de facto silver monometallism to de facto gold monometallism.

    This statement rings true. Gradually, the Federal government moved U.S. citizens from a silver standard that was more or less a market choice to a gold standard established by fiat.

    … a gold standard can be genuine without being “pure,” that is, despite the presence of paper money (or spendable bank deposits) backed by assets apart from gold itself.

    I agree; however, notes promising gold, and backed by assets other than gold, are not backed only by the other assets when gold is a legal tender for the payment of debts, particularly debts imposed by statutory fiat. If the state accepts gold and these notes in payment of taxes, then I must obtain gold or these notes, even if I prefer to deal in silver for example. Statutory force thus favors gold as a currency over other currencies. Market forces favor only a few currencies, even a single currency at a given instant, so statutory force tips the balance in favor of a fiat currency. The chartalist, state theory of money, asserting that a fiat currency requires no backing other than the value of paying protection money, is clearly true.

    Thus “silver certificates” issued by the U.S. Treasury between 1878 and 1933, though “backed” by silver, were worth their nominal value not in the silver for which they were exchanged (the market value of which was well below its then inoperative mint value) but in gold, thanks to the limited number of certificates issued and (after 1890) to their being redeemable for gold.

    These certificates were legal tender for payment of public debts. I could pay taxes in them at face value. I could buy postage stamps with them at face value. The silver backing was secondary as you say. The "copper backing" (or zinc backing or whatever) of a copper penny is also secondary.

    These notes were worth their nominal value in the statutory standard of value, and the standard by this time was gold exclusively. Gold was still freely coined, while silver was not, so the value of gold coins did not depart from the value of gold. The market value of gold therefore reflected the fiat value of gold coins, while the market value of silver could be lower than the value of silver coins and certificates, just as the market value of a quarter can be greater than the value of its constituent metals.

  • … a neat demonstration of the fact that a gold standard can prevail even despite legal tender legislation favoring an altogether different standard.

    California's legislature nullified the Federal Legal Tender Act with its own Specific Contract Act in 1863. State courts in California and Oregon also declared that these states would not receive greenbacks in payment of public debts (taxes).

    The gold standard did not prevail over a legal tender in these states, because the greenback was not a legal tender in these states, regardless of wishful thinking by statesmen half a continent away already preoccupied with imposing their will on rebellious states in their neck of the woods.

    That western states could resist a Federal declaration of a legal tender was evidence, at this time, of the limited power of the Federal government to establish a legal tender throughout the territory it wished to govern, not evidence that a legal tender did not drive out other currencies.

    If California and Oregon had accepted and paid out greenbacks, and otherwise cooperated with the Federal government's legal tender law, only then would a continuing refusal by merchants to deal in greenbacks be evidence of another currency prevailing over a legal tender.