The True Gold Standard (Second Edition)
Barry Eichengreen (2011) writes:
Briefly, the classical conception of the “lender of last resort,” spelled out by the English journalist and banking historian Walter Bagehot (1871) during the classical international gold standard era, is an institution that lends reserves to illiquid (but solvent) commercial banks in a period of peak demand for currency or bank reserves, in the extreme during a period of bank runs. Its aims are to prevent regrettable bank insolvencies due to hasty asset liquidations, and to satisfy the public’s demand for currency or reserve money so that the runs cease and the market calms. This seems to be the notion that Eichengreen has in mind.
Assuming that the Federal Reserve exists and is the agency to which the role is assigned, Professor Eichengreen takes a true gold standard to imply that “it could provide additional credit only if it somehow came into possession of additional gold.” That is, the gold standard is not “true” unless it imposes a 100 percent gold marginal reserve requirement on central bank liabilities. This is a highly idiosyncratic understanding of a true gold standard. Peel’s Act of 1844 did impose a 100 percent marginal gold reserve requirement on expansion on the Bank of England’s note-issues, but the Bank could still provide additional credit by expanding its deposit liabilities. Indeed the Bank is generally understood to have acted as a lender of last resort during the Baring Crisis in 1890, while Peel’s Act was still in place.
A 100 percent gold marginal reserve requirement on all central bank liabilities would constrain last-resort lending. But imposing such a rule on the central bank is not required to have a true gold standard, and indeed having a central bank is not even required. A gold standard, again, is generically defined by gold serving as the medium of redemption and medium of account, not by any reserve requirement imposed on a central bank. The United States was on the classical gold standard without a central bank from 1879 to 1914. During that period, private clearinghouse associations acted as lenders of last resort to their member banks (Timberlake 1984). So a central bank is not even necessary to have a lender of last resort.
Eichengreen (2011) argues that “confidence problems are intrinsic to fractional-reserve banking and why an economy with a modern banking system needs a lender of last resort.” But as noted in Section 6 above, confidence problems are minimal if no legal restrictions prevent banks from adequately capitalizing and diversifying themselves.
Oct 20, 2014
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...
The Federal Reserve System's James Narron and David Skeie, career officials with the Federal Reserve System, are two eminent historically erudite figures. Writing in the New York Federal Reserve Bank's online publication, Liberty Street Economics, they recently provided a continuation of their valuable historical "revue," Crisis Chronicles: The Collapse of the...
Jul 23, 2014
An article headline in Saturday’s Wall Street Journalread “Rate Talk Heats Up Within The Fed.” As Journalreporters Jon Hilsenrath and Michael Derby...
Jun 30, 2011
Key Monetary Writings
Observations on the Greece financial crisis and what America can learn: Greece is only one example of an irresponsible, reckless, insolvent...
Why the Gold Standard?