Under a true gold standard, moreover, the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster. Its proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.
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.
... While the Fed's easy-money policies have not produced many jobs, they have produced a persistent, low rate of inflation that is choking the American middle class. Since the asset purchases began five years ago, the average American family has experienced rising prices and stagnant wages. The resulting decline in living standards explains why voters ranked rising prices nearly tied with unemployment as their top economic concern during the 2012 election.
... It is difficult to interpret [Jeb] Hensarling’s declaration to hold hearings on “the entirety of their hundred year history and what America has looked like since adopting a fiat currency” as anything but an intention to bring the Commission up for a vote. Hensarling promises to process vast amounts of information. The constraints on a committee hearing, and on a committee staff, cannot do such a huge topic justice. As Rep. Kevin Brady put it in his own remarks at Cato, a “brutally bipartisan” Commission — with Hensarling a Commissioner — is called for.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
The Problem of the Quantity Theory of Money
Rueff’s first work in monetary theory, Theorie des Phenomenes Monetaires (1927), was devoted partly to examining the theories put forward by Irving Fisher in The Purchasing Power of Money (1911). Rueff himself owed a large debt to Fisher, as does all of economics, for ideas like the modern understanding of income and capital. But Fisher is best remembered for his famous Equation of Exchange:
MV + M’V’ = PT
where M is the supply of money, M’ the supply of bank credit, and V and V’ referred to the “velocity of circulation” of money and bank credit, respectively.
"By means of the lawful stamp of convertibility to gold, a near-worthless paper was suffused with a monetary life of its own. It circulated in place of coins and bullion because it was even more convenient, equally divisible, and above all secured by the substance of real money. Moreover, convertible paper and deposit currencies conserved still further the scarce mineral, labor, and capital resources previously invested in the production and circulation of precious bullion or coins. One sees in the evolution of this extraordinary commercial institution of exchange that money became a unique conservator, and the effective mechanism of growth of a civilization born of scarcity."
Venezuelan President Nicolás Maduro rules by degree. His own puppet legislature is apparently not sufficient reliable. His latest decree lowered the prices of electronic appliances to populist-appealing levels.
Under Maduronomics, food producers have been driven out of business, and basic necessities have been driven off the store shelves. The Los Angeles...
This cartoon cleverly presents the tension between the proponents of the classical gold standard and the prairie populists demanding "the free coinage of silver."
Image courtesy of authentichistory.com via BigThink.com
In the mouth of the "silver dog with the golden tail" is a bone, labeled Election.
The 1896 election, which the gold standard...