Exclusive interview with Prof. Lawrence White, Part 3

Lawrence H. White is an  economics professor at George Mason University who teaches graduate level monetary theory and policy.

Lawrence White

As described by the Wikipedia, "White earned his BA at Harvard University (1977) and PhD at the University of California at Los Angeles (1982). Before his current role at George Mason University he held a position as F. A. Hayek Professor of Economic History with the University of Missouri–St. Louis Economics department from 2000 to 2009, teaching American Economic History, Monetary Theory, and Money and Banking. Previously, he was Assistant Professor at New York University and Associate Professor at The University of Georgia in Athens, Georgia.

"Articles by White on monetary theory and banking history have appeared in the American Economic Review, the Journal of Economic Literature, the Journal of Money, Credit, and Banking as well as other professional journals. White is an associate editor of the "Review of Austrian Economics", a contributing editor to the Foundation for Economic Education's magazine The Freeman and an adjunct scholar of the Cato Institute."  Thegoldstandardnow.org is pleased to present this exclusive interview, originally to be published in three parts, now extended to four, of which this is the third:

Q:  There are several schools of thought within the community of gold standard advocates.   Which of these strike you as soundest?

A: The soundest or most robust monetary system is one that does not depend on the kindness or omniscience of central bankers or Treasury officials.  In my view that means an international gold standard with international free banking.  Let the invisible hand guide monetary arrangements.  Issuers of gold-based (or other) money are not to be kept out of the market by legislated restrictions, nor kept in the market by legislated immunity from the profit and loss test.

Q:  Jacques Rueff was an intense critic of the gold-exchange standard, as is Lewis Lehrman, John Mueller (and your interviewer).  What is your view of the gold-exchange standard (both as implemented at Genoa and, after World War II, at Bretton Woods)?

A: The interwar system and Bretton Woods are the two prime examples of fragile monetary systems that were jerry-rigged by well-meaning central bankers and Treasury officials who could not foresee the incompatible incentives they were creating.  The classical gold standard worked better when central banks unimaginatively played by the rules of the game, and even better in countries that had not yet created central banks to countervene the rules.

Q:  You have provided some very thoughtful analysis of the likely optimal parity level of the dollar into gold under a restoration of the gold standard.  Would you care to elaborate further?

A: The smoothest re-entry parity, gold ounces per dollar, is one that aligns the current purchasing power of the dollar to the post-re-entry purchasing power of gold.  In other words, it respects the concept of “purchasing power parity.” It avoids pushing the purchasing power of the dollar significantly upward or downward from where it is now.  A parity of too many gold ounces per dollar would push the purchasing power of the dollar upward, or in other words force the price level downward.  That makes for a rocky transition in a world of sticky nominal prices and wages, as Winston Churchill found when he tried to re-establish the pound sterling’s old pre-war parity in 1925 despite the UK having a dramatically higher price level, due to having printed so many irredeemable pounds during the First World War.  It makes gold flow out to where its purchasing power is higher, which contracts the domestic money supply and puts the economy through a wringer.  Too little gold per dollar, on the other hand, would force the price level upward, causing a needless inflation.  It would also attract gold from around the world, making it an expensive proposition.  I reckon that the US Treasury’s gold, if it has as many ounces as it says it has, is enough to replace the US banking system’s reserves with sufficient gold reserves at the current dollar price of gold, and even have some left over.

Q:  What do you see the next steps which need to be taken to give the gold standard a respected seat at the table in the discussion of optimal monetary regimes?

A: My own first priority is to debunk the idea that the Federal Reserve System has a good track record running a discretionary monetary policy, by comparison to the track record of the automatic classical gold standard, in hopes of opening the eyes of academic economists.  I hope that the article that George Selgin, William Lastrapes, and I published in the Journal of Macroeconomics (Sept. 2012), entitled “Has the Fed Been a Failure?,” will contribute to that.  I also have a piece entitled “The Merits and Feasibility of a Commodity Standard” forthcoming in the Journal of Financial Stability. If academic economists became more aware of the gold standard’s merits, their change of outlook would help to open up discussion in the policy arena.

To read Part 1, click here.