This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

Daylight savings time and floating exchange rates

Today the United States switched from daylight savings time to standard time. Europe has already done so, as Lars Christensen noted in a recent post. Lars used the occasion, as I will, to bring up Milton Friedman's analogy between daylight savings time and floating exchange rates in  Friedman's essay "The Case for Flexible Exchange Rates" (written in 1950 and published in 1953). Lars used the analogy to discuss nominal GDP targeting. I will use it to discuss its original subject. Friedman contends that instead of changing schedules in the summertime, it is easier for everybody to change the time and keep the same nominal schedules as before. Similarly, he contends that instead of changing many nominal prices, it is easier to change the nominal exchange rate and keep nominal prices the same.

It is unclear whether daylight savings time actually has much benefit. In countries that have it, though, people only change their clocks twice a year. What would it be like if they had to change their clocks twice each minute, which is how fast exchange rates sometimes change? I am aware of no free banking system that has ever had a floating exchange rate as a permanent feature rather than as a temporary expedient. Of course, that was in a context where fixed or pegged exchange rates were almost universally viewed as the norm. Things might be different were free banking to return today. I remain skeptical, though.


  1. If the number of Dollars increases less than the number of Pounds do then, eventually, the "exchange rate of the Pound to the Dollar" will fall – and to try and rig ("fix") the exchange rate is folly.

    The so called "return to the gold standard" (the use of the term "gold STANDARD" confuses the issue – even the commodity is the money or it is not, to call it a "standard" for something else that is the money is just a mess) by Britain in 1925 was actually an effort to rig ("fix") the exchange rate of the Pound to the Dollar.

    It was an effort to pretend that the First World War (the massive increase in the British money supply during the war) had not happened. The American Federal Reserve (particularly Benjamin Strong of the New York Federal Reserve) tried to help the British insanity by pumping up the supply of Dollars – thus leading to the "boom" of the late 1920s and the INEVITABLE "bust" ar the end of the period.

    More recently governments such as that of Pinochet in Chile and the Lawson period of the Thatcher governement in Britain tried to rig ("fix") exachange rates and again (like all price fixing – whether it be "anti gouching" laws in New York and New Jersey now, or the general insanity of minimum wage laws and rent control) the results were terrible.

    Markets (buyers and sellers) must be free to find prices by a discovery procedure – governmnet price rigging ("fixing") is insane – whether it is for the exchange rate or anything eles.

    "If gold is money can there be an exchange rate".

    Yes there can be – if another country has silver (or some other commodity) as money, or has a fiat currency (as all countries do now).

    The price of gold must not be "fixed" in terms of any fiat (government whim) currency, and the price of gold must not be "fixed" in terms of silver or any other commodity.

    Efforts to rig ("fix") the price of silver to the price of gold just drive either silver or gold off the market.

    By the way "Gresham's law" only applies under conditions of rigged ("fixed") exchange rates.

    Let gold and silver (and everything else) operate in a free market – where buyers and sellers will establish true prices.

    Last point.

    "GDP" is a terrible measure of the economy – it (for example) assumes that government spending is productive activity, which it is not.

  2. No, assuming that it is a free market, which means that gold is accepted as money. It makes no difference if Real Bills are also accepted as money, silver, sea shells, and wampum.

    The FX problem exists only if there is different irredeemable paper in each country.

  3. Then there would still be a series of floatingexchange rates amongst those other monies and gold. It's not forex in a strict sense, but its still about variable rates of exchange amongst different currencies.

    1. In a free market, where people are not forced to use irredeemable paper money, there are no other currencies. There are various forms of notes and bills. But their value is based on the gold into which they mature.

      Internationally, gold is gold.

Comments are closed.