Larry White on the Gold Standard

Late last week I got the results of my mid-term exam in Jeff Hummel’s Masters class in Monetary Theory and Policy. I got an A. (Yay!) When I told my wife, she said she would’ve been surprised if I hadn’t, given that I was the only economics professor, other than the lecturer, in the class. But if I hadn’t read any of the articles or seen and taken notes on any of the lectures, I probably wouldn’t have got more than 60%, which in a Masters class is essentially a failing grade.

Anyway, I’m learning at least a few new interesting things each class. The main textbook is Lawrence H. White’s The Theory of Monetary Institutions. I like the content and I like Larry’s dry humor.

Here’s a relevant section in his chapter on commodity money:

In addition to the average rate of inflation, investors worry about the unpredictability of the price level or the inflation rate. Clear and meaningful measurements of unpredictability, allowing a reliable historical comparison of commodity with fiat regimes, are hard to make, basically because expectations cannot be directly observed. One important piece of evidence strongly suggests, however, that investors had greater confidence of their ability to predict the price level, at least at long horizons, under the historical gold standard: the long-maturity end of the bond market has sharply contracted with the switch to fiat standards. Risk-averse investors naturally shy away from (unindexed) securities that promise payoffs of nominal dollars 25 years in the future, if they cannot confidently forecast the purchasing power of the dollar 25 years ahead. Under the gold standard in the nineteenth century, some railroad companies found ready buyers for 50- and 100-year bonds. Today corporate bonds of 25 or more years in maturity are uncommon. As calculated by Benjamin Klein (1975, p. 480), the weighted average maturity of new corporate debt issued by US firms during the 1900-1915 period was 29.2 years; during the 1956-1972 period, it was 20.9 years. One would expect that the figure has shrunk even more since 1972.

I took Ben Klein’s Ph.D. Monetary Theory course at UCLA in about 1973 when he was putting these data together. He talked about those data in class.

Now to the dry humor part. Larry then writes:

The main utilitarian arguments for adhering to a gold standard rest on the proposition that it more reliably preserves the purchasing power of money (gold is said to be more “trustworthy” and “honest”) than a fiat standard.7

Footnote 7: Commentators sometimes speak of the gold standard’s “mystique”. Presumably, this means that the commentator is not persuaded by history (or by such figures as those in the text) that a gold standard is more reliable than a fiat standard, and does not understand why others are.

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