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I'm not surprised to see @judyshel come under attack for her defense of the gold standard ahead of her Senate Banking Committee confirmation vote next week. But it is sad to see the same old tired arguments paraded about, with little consideration of the historical record. 1/n
Consider this article, which appeared today at The Hill. "In the nearly 50 years since" Nixon abandoned gold, @D_W_Wilcox writes, "no country on earth has seen fit to use this outmoded approach to setting monetary conditions." 2/ https://thehill.com/opinion/finance/507548-the-case-against-judy-shelton-for-federal-reserve-board
While that is mighty fine evidence that the gold standard is not politically feasible, it does not imply that the gold standard performs worse than discretionary central banking. We could look at the historical record, of course. But Wilcox prefers a theoretical argument. 3/
There is no denying that "central banks have learned" over the years. But there have been plenty of missteps. The Great Inflation in the 1970s, when money was too loose, and the Great Recession of 2008-09, when money was too tight, come immediately to mind. 4/
In the latter case, the initial policy blunder was made much worse by a new-fangled operating regime--adopted to prevent inflation from picking up--that kept monetary policy tight even after the Fed realized inflation was too low. But I digress. 5/ https://www.aier.org/article/monetary-policy-in-the-crisis-a-dam-mistake/
Why is the gold standard bad? Wilcox claims it "disables...shock absorbers that...help to stabilize economies in the face of unexpected turbulence." That's just not true. 6/
When a country suffers an adverse aggregate demand shock, domestic output and prices fall relative to trend and, correspondingly, the purchasing power of domestic money rises. Under a gold standard, the rise in purchasing power causes gold to flow into the suffering country. 7/
It also encourages miners to bring more gold to market. That's right, folks. The gold standard automatically adjusts the supply of money to offset changes in aggregate demand, which is exactly what we would like discretionary monetary policy to do. 8/
I'll be the first to admit the gold standard mechanism is slow. A well-functioning central bank would offset AD shocks more quickly. But there is an important distinction between doing the wrong thing, as Wilcox claims, and doing the right thing slowly. 8/
It is also naive to assume we have access to a well-functioning central bank. This is especially true in developing countries, as Kurt Schuler has written. 9/ https://iea.org.uk/publications/research/should-developing-countries-have-central-banks
But, even in the US, it is not clear whether the Fed is getting better over time or just oscillating from one mistaken regime to another. 10/ https://www.aeaweb.org/articles?id=10.1257/jep.27.4.65
The relevant question is one of relative comparisons: do actual central bank managed fiat monies tend to perform better than actual gold standards? To answer that, we should turn to the historical record. 11/
The gold standard resulted in lower, more-predictable inflation; reduced exchange rate risk; and reduced international borrowing costs. It was not associated with greater output volatility or higher unemployment. 12/
My @aier @SoundMoneyProj colleague @alexwsalter calls the gold standard a "civilized relic." 13/ https://www.aier.org/article/that-civilized-relic-a-monetary-system-as-good-as-gold/
My dissertation advisor @lawrencehwhite1 suggests that the gold standard is "still the gold standard among monetary systems." 14/ https://www.cato.org/publications/briefing-paper/is-gold-standard-still-gold-standard-among-monetary-systems
The always-excellent, freshly-minted PhD @BryanCutsinger concludes that the gold standard appears to be "superior in some respects and no worse in others." 15/ https://www.sciencedirect.com/science/article/abs/pii/S1062976920300302
To be clear: I am not advocating for a return to the gold standard. I am advocating for a better understanding of actually existing monetary alternatives. 16/
So, if you are planning to write an op-ed about @judyshel's views on the gold standard, take a few minutes to read this brief explainer by @GeorgeSelgin. It is a small investment that will keep you from making the same old historically-uninformed mistakes as others. 17/
Disclosure: Shelton was director of the Sound Money Project, prior to its move from Atlas to AIER. I was a fellow w/ the SMP at the time. I am now the director of SMP at AIER. Interestingly, I don't recall ever actually communicating with Shelton. But discount accordingly. 18/18
