Two sharp economists whose blogs I enjoy reading were off-base last month on a common theme, which merits correction. Stephen Williamson said of Alan Greenspan’s 1966 essay "Gold and Economic Freedom" that Greenspan “thinks that the ‘golden’ age of monetary arrangements existed prior to the existence of the Federal Reserve System. Most monetary historians think of the National Banking era (1863-1913) as a period when the financial system of the United States was fatally flawed, as it produced repeated banking panics.”

James Hamilton similarly wrote, “The question should not be whether long-term growth occurred under the nineteenth-century gold standard, but instead whether the monetary system contributed to cyclical instability over that period. It is hard to make the case that it was helpful. The graph below plots short-term U.S. interest rates over the period 1857-1915. With some regularity, the cost of borrowing would spike up in dramatic financial events, as it did for example in the panics of 1857, 1873, 1893, 1896, and 1907.”

As some economists have known ever since the 1890s (see for instance L. Carroll Root, "Canadian Bank-Note Currency," in Sound Currency, v. 2, no. 2, December 15, 1894, starting on p. 310 of this compilation volume), the panics were not a result of the gold standard, but, to a large extent, of restrictions on note issue and branch banking. The restrictions made the American banking system far more fragmented and fragile than the systems of countries that had no such restrictions, such as Canada. Williamson, who attended university in Canada, has in fact written articles making precisely that point.