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The necessity of distinctions

Paul Marks, a frequent poster of comments, claims that the concept of a gold standard is misleading because “either gold is the money or it is not.” Sorry, the epigones of Murray Rothbard need to learn a lot more monetary history here. There are many kinds of arrangements under which “gold is the money” but who can get the money and under what circumstances is restricted. Consider these cases:

Medieval gold standard: Before the era of circulating notes. People often used “imaginary monies” corresponding to no current coin in circulation. If you got paid in gold, it would be with a grab-bag of available coins, perhaps by weight or perhaps by tale (face denomination) if the coins were not terribly worn and had a good reputation for uniformity.

Classical gold standard (1800s-1914): Half the world or more did not have central banks. Gold was minted into coins that circulated widely. People could redeem even small amounts for standard gold coins. Redemption even for large amounts was often made with gold coins and not with bullion.

Gold bullion standard: First proposed, I believe, by David Ricardo at a time when Britain was off the gold standard and gold coins had disappeared from circulation. The minimum unit of redemption would be a gold bar with a high value, restricting redemption in practice mainly to banks.

Currency board on gold: Yes, there were a few cases where currency boards held substantial reserves (one-third or more of the value of currency in circulation) in precious metals, and the rest in foreign securities.

Gold exchange standard: As practiced in the 1920s, countries on the gold exchange standard held large amounts of interest-bearing foreign assets denominated in major gold-convertible currencies where before World War I they would instead have held gold. The result looked a lot like the classical gold standard on the surface but had an element of foreign-currency risk for gold-exchange central banks that had been smaller under the classical gold standard.

Bretton Woods system: Central banking had taken over the world by this time. No gold coins circulated. Only one currency in the system, the U.S. dollar, was readily redeemable for gold, and then only by foreign governments, not by U.S. or foreign private individuals or banks. Exchange controls on most currencies in addition to restrictions on the use of gold.

Advanced free banking system on a gold standard: Gold coins are legal but nobody wants them for everyday use because they are cumbersome, and maybe nobody even mints them. The public is free to demand gold from banks but nobody does so for monetary purposes. Instead, gold remains in bank vaults and serves only as a medium of settlement among banks, except when demand to use gold in industry makes some withdrawal of gold from banks profitable.

100% gold standard: As George Selgin has pointed out, this is a system that seems never to have existed anywhere that banking has been competitive.

If you don’t distinguish among the characteristics of these arrangements, and that accordingly all but the first and maybe the last are systems in which “gold is not the money,” you can’t understand thoroughly how they work. Additionally, by implicitly lumping them with fiat money systems, in which gold is definitely not the money, you lose insight into why the various gold standards, whatever their flaws, have had lower inflation than fiat money systems.

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