Stability and the Financial System | by Finbarr Timbers

What with the Republican National Convention happening right now in Tampa and the party’s new found love for the gold standard, it is important to consider whether or not the gold standard can, actually, accomplish all that is expected of it. The main argument for reverting to the gold standard is that it will a) keep inflation low and b) help prevent financial crises.

In his blog, Krugman has a pretty strong argument against it, as does the IMF, where in one of their working papers [1], one finds that

“the Free Coinage Act [2] inaugurated a series of commercial panics and disasters which to that time were completely unknown, and between 1694 and 1890 twenty-five years never passed without a financial crisis in England.”

In other words, not only would returning to a gold standard not help the American financial system, it would make it far more unstable.

[1] The IMF paper has a very interesting proposal: to implement the so-called “Chicago Plan,”  a Depression-era proposal to “separate the monetary and credit functions of the banking system,” i.e. separating the ability to create money in the form of credit, and the storing of deposits. This would give the government a lot more control over the money supply, and would allow the central bank to respond much more effectively in times of crisis.

[2] The Free Coinage Act of 1666 removed control of the monetary supply from the government, and allowed English citizens to create their own, gold backed currencies. This would be similar to what would happen with a gold standard, as then the money supply would be controlled by whomever controlled the gold.

Finbarr Timbers is a third year math student who is deeply interested in developmental economics. When not in class, Finbarr is either running or trying to explain what, exactly, ring theory is to bemused arts students. Finbarr is currently reading A World Restored: Çastlereagh, Metternich and the pushe for peace 1812-1822 by Henry Kissinger.

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