Gold Standard Era Research Articles

The rise of inflation targeting

AbstractThis paper discusses the interactions between politics and economic ideas leading to the adoption of inflation targeting in the United States. In the gold standard era, farmers' vulnerability to falling prices made price‐level stabilization a salient political and social concern. Economists of the progressive era honed in on price‐level stabilization as a key to promoting prosperity and social justice. Irving Fisher, in alliance with farm interests, helped members of Congress introduce price‐level stabilization bills that, while unsuccessful, introduced the possibility that a price‐level stabilization mandate might be a viable alternative to a gold standard. In the postwar years, the Great Inflation and Volcker disinflation set the stage for the rise of inflation targeting by highlighting the benefits of credibility, transparency, and expectations management. Tensions inherent in the implementation of inflation targeting—including its position in the “rules versus discretion” debate—have become more pronounced since the post‐COVID run‐up in inflation.

Interest rate, price level, and the inflation rate: Evidence from the UK during the gold standard regimes

AbstractThis paper empirically investigates the Gibson Paradox and the Fisher Effect for the UK during different metallic and non‐metallic regimes. The paper applies long‐span monthly data on the long‐term interest rate and the price index from 1790 to 1931. The ARDL cointegration is employed to study the long‐term relationship. Significant evidence is provided for the paradox during the uninterrupted gold standard era of the UK (1821–1914). We also find evidence of the paradox during the short‐term gold exchange standard era (1925–1931). Further results also confirm the Fisher Effect during the 1821–1914 period, providing some backing to its ability to explain the paradox. This is further asserted by the short‐run mutual influence between the rate of interest and the inflation rate.

Lending of Last Resort in Monetary Unions

The European Central Bank’s activities as lender of last resort are especially controversial in Germany. The overriding concern of the critics is an alleged tendency of creating moral hazard on the side of public and private borrowers in the European Monetary Union. This contrasts with the predominant views among German economists in the classical gold standard era, when the newly founded German empire merged the many currency areas in its realm into monetary union. Prominent experts and policy advisors, such as Erwin Nasse, Adolph Wagner and Friedrich Bendixen, argued that in view of the costs of system failures moral hazard ought not to be a predominant consideration at times of crisis. In critical assessments of the Currency vs. Banking debates in England, German commentators questioned the credibility and sustainability of strict rules for monetary policy in banking crises. Some even developed evolutionary views, in which monetary integration is driven by financial markets and lending of last resort becomes a constitutive characteristic of central banking, in particular in the formation of a monetary union. This paper compares the older German views about lending of last resort in monetary unions with the current discourse and explores possible explanations for the differences.

Inflation and the negotiation of wages. Comparative responses to monetary changes in Germany and the United States during the Gold Standard Era, 1876–1926

ABSTRACT Negotiations over wages have always been a central part of industrial relations in capitalist economies. The unstable value of money in the 19th and 20th centuries has made these negotiations both crucial and complex. Linking contemporary understandings of monetary values to wage bargaining provides an important historical background for a better understanding of real wage developments and the agency of workers. Adopting a comparative perspective, this paper discusses how managers and workers dealt with changing monetary values in Germany and the United States from the 1870s to the immediate aftermath of the First World War. The paper also discusses the extent to which actors understood the instability of their respective currencies’ purchasing power and whether their perceptions changed over time. The paper reveals that negotiations were never exclusively shaped and guided by concepts such as inflation or the ‘cost of living’ in both countries but that the importance of the concepts changed with the level of price fluctuations and institutional setting. Indices could achieve a dominant role only in exceptional circumstances due to their artificial and contestable nature, their neglect of the complexity of workers’ job contexts and living environments, and their normative implications concerning wage demands.

Artificial Intelligence in the Nigerian Legal Industry: A Threat or an Opportunity?

The Fourth Industrial Revolution is changing the world as we know it. Among the key drivers of this expeditious change is Artificial Intelligence (AI). With the enterprise adoption of deep learning and machine learning algorithms, AI disruption has affected several industries. Considering AI's exponential growth, its disruption shall likely extend to every sector in the foreseeable future. Nonetheless, AI disruption is more of an innovation than a threat - a new gold standard era, in the legal sector. Unfortunately, the Nigerian legal industry seems unprepared for the impending transformation. Aside from its conservative nature which is a deterrent to innovation, the majority of Nigerian Legal Industry perceive AI as a doomsday, which will lead to job loss or possibly upset the status quo. When not feared, there is only much talk about AI and no action. In recognition of the above-stated problems, this paper offers a pragmatic and fresh perspective. AI is not an apocalypse for the legal profession. Instead, AI will forever change the narrative as it would become a tool for lawyers to become extraordinaire. In the automation age, lawyers without requisite skills will die. This paper highlights these skills and discusses how the Nigerian lawyer can develop them. Only an innovative lawyer can survive tomorrow's legal practice.

Pegxit pressure

We analyze whether trade shocks put pressure on pegs to break. Using new high-frequency data on prices and export portfolios from the classical gold standard era, we identify a negative causal relationship between export-price shocks and currency-risk premia in emerging market economies. The results indicate that negative export-price shocks increased the probability that countries would abandon their pegs.

The Classic Gold Standard: 1870–1914

Debates on issues about the economy, growth, inequality, fiscal responsibility, and financial crises frequently reduce to debates about money. Moreover, debates about money often reduce to the soundness of money, meaning the ability of a unit of currency to retain its value. Eventually, discussions about soundness touch on the classic era of the gold standard. The aims of this note are to (1) describe the mechanism of the international monetary system known as the gold standard during the time that it had the greatest influence on the global economy; (2) place the gold standard in context with other systems that preceded and followed it; and (3) dispel some enduring misconceptions. Excerpt UVA-F-1921 Nov. 7, 2019 The Classic Gold Standard: 1870–1914 Debates on issues about the economy, growth, inequality, fiscal responsibility, and financial crises frequently reduce to debates about money. Moreover, debates about money often reduce to the soundness of money, meaning the ability of a unit of currency to retain its value. Eventually, discussions about soundness touch on the classic era of the gold standard. The aims of this note are to (1) describe the mechanism of the international monetary system known as the gold standard during the time that it had the greatest influence on the global economy; (2) place the gold standard in context with other systems that preceded and followed it; and (3) dispel some enduring misconceptions. The Gold Standard in History The classic gold standard era commenced in the 1870s and ended with the suspension of the gold standard at the outbreak of World War I in 1914. Before this era, the major trading nations of the world relied on silver and gold coins as the basic money stock, supplemented by banknotes that were claims on silver and gold. The monetary standard of silver and gold was called bimetallism. Its chief advantage was that the two metals combined seemed to afford a sufficient supply of money with which to finance the growth of the developed economies. Its chief disadvantage was that it forced the major nations to declare a rate of exchange between the two metals (such as setting 16 ounces of silver equal in value to one ounce of gold), which created an arbitrage opportunity for speculators whenever the market prices of gold and silver diverged from the statutory exchange rate. . . .

The political economy of exchange rate stability during the gold standard. The case of Spain, 1874-1914

This article contributes to the literature on central bank independence and monetary stability during the classical gold standard era. On the eve of the First World War, European periphery had not achieved stable adherence to gold despite the protection of central banks against political pressures to monetize debt. In the 19th century, most issuing institutions were private banks whose main objective was profit maximization. As a result, monetary stability depended on negotiations between monetary and fiscal authorities and not directly on central bank independence as is the case nowadays. Strong governments were needed to impose the objective of monetary stability on central banks in negotiation practices. To test our argument, we have constructed indicators of government strength and central bank independence to measure bargaining power for the case of Spain. Results confirm that a highly independent private central bank avoided the responsibility of defending gold adherence when negotiating with weak government, even in a stable macroeconomic environment. Our research suggests that the success of central bank independence in generating monetary stability during the gold standard period depended on sound political institutions.

Emphasis and effectiveness of monetary policy of the Fed: a historical comparative analysis (1871-2013)

Results of this paper indicate that the effectiveness of monetary policy may reflect changes in policy emphasis on inflation and output growth. The evolution of the unmanaged to managed short-term interest rate as a monetary policy tool demonstrates a continuing correcting process of a biased sensitivity towards output growth in the gold standard era to a more balanced emphasis on price stability and output growth in the modern-Fed period. Evidence of this study suggests that the monetary policy with a more balanced emphasis on inflation and output can enhance the policy effectiveness measured by a simple assessment ratio which links GDP gap and standard deviation of inflation together so that the ratio can directly quantify the Fed's two top policy goals, promoting sustainable output growth and lowering price volatility.

Emphasis and effectiveness of monetary policy of the Fed: a historical comparative analysis (1871-2013)

Results of this paper indicate that the effectiveness of monetary policy may reflect changes in policy emphasis on inflation and output growth. The evolution of the unmanaged to managed short-term interest rate as a monetary policy tool demonstrates a continuing correcting process of a biased sensitivity towards output growth in the gold standard era to a more balanced emphasis on price stability and output growth in the modern-Fed period. Evidence of this study suggests that the monetary policy with a more balanced emphasis on inflation and output can enhance the policy effectiveness measured by a simple assessment ratio which links GDP gap and standard deviation of inflation together so that the ratio can directly quantify the Fed's two top policy goals, promoting sustainable output growth and lowering price volatility.

Purchasing power parity and the behavior of prices and nominal exchange rates across exchange-rate regimes

The evidence presented in this paper shows that purchasing power parity as a long-run proposition is indeed a very useful approximation. We see this quite clearly in the panel data for three historical periods examined here – the classical gold standard era from 1870 to 1914, the interwar period from 1921 to 1939, and the period after World War II from 1959 to 1998. Price-level behavior across countries differs in the way that PPP suggests when monetary arrangements differ and is highly similar when monetary arrangements are themselves similar. Inflation rates adjusted for exchange rate changes in general are highly correlated and bear a one-to-one relation to one another within and across the three periods and the varied monetary regimes that prevailed.

Estimation of historical inflation expectations

Expected inflation is a central variable in economic theory. Economic historians have estimated historical inflation expectations for a variety of purposes, including studies of the Fisher effect, the debt deflation hypothesis, central bank credibility, and expectations formation. I survey the statistical, narrative, and market-based approaches that have been used to estimate inflation expectations in historical eras, including the classical gold standard era, the hyperinflations of the 1920s, and the Great Depression, highlighting key methodological considerations and identifying areas that warrant further research. A meta-analysis of inflation expectations at the onset of the Great Depression reveals that the deflation of the early 1930s was mostly unanticipated, supporting the debt deflation hypothesis, and shows how these results are sensitive to estimation methodology.

A Quantum Theory of Money and Value

The answer to the question “what is money?” has changed throughout history. During the gold standard era, money was seen as gold or silver (the theory known as bullionism). In the early 20th century, the alternative theory known as chartalism proposed that money was a token chosen by the state for payment of taxes. Today, many economists take an agnostic line, and argue that money is best defined in terms of its function, e.g. as a neutral medium of exchange. This paper argues that none of these approaches adequately describe the nature of money, and proposes a new theory, inspired by non-Newtonian physics, which takes into account the dualistic real/virtual properties and complex nature of money. The theory is applied to the example of the emergence of cybercurrencies.

Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk

We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed-effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected that they devaluation.

Return to Gold-Based Monetary System: Analysis Based on Gold Price and Inflation

Researchers and economists clarify that the problem of inflation and the currency instability occurs today is due to the implementation of monetary system which is not based on valuable commodity or gold as the gold standard of the previous system. As a sequence to this, there has been a proposal to create a Bretton Woods II system by the World Bank President, Robert Zoelick, recently in 2010. The question is whether the return to gold currency is justifiable in order to ensure world economic stability. Therefore, this study aims to analyze the historical data of the inflation rate and world gold price in order to identify a more stable financial system. The study will provide evidence that the gold standard era is the most stable era thus justifies the return to gold currency. This study uses time series data for a key economic indicator i.e. inflation rate starting from year 1880 to 2008, divided into three phases of gold standard system; i.e. the full gold standard system (1880-1914) and the gold exchange standard system (1925-1931); the Bretton Woods system (1946-1972) and the fiat currency system (1973-2008), using regression model and CUSUM test. The results show that the rate of inflation and the value of world gold are much lower and more stable during the gold standard phases than the fiat money. This indicates that the move to return to gold currency is more apt in the bid to ensure global economic stability. However, more efforts are needed to resolve the implementation mechanism.

The rise and fall of sterling in Liberia, 1847–1943

Recent research on exchange rate regime choice in developing countries has revealed that a range of factors, from weak fiscal institutions to high costs of borrowing in their own currencies, limits the range of options available to these countries. This article uses the case of Liberia to illustrate that new states in Africa during the gold standard era faced similar limitations, even in the absence of formal colonial rule. The rapid depreciation of the Liberian dollar in the nineteenth century led to the adoption of sterling as a medium of exchange and store of value. This initially made it easier for Liberia to service its sterling‐denominated debt and for Liberians to purchase imports from Britain. However, as economic relations with the US deepened during the twentieth century, instability in the pound–dollar exchange rate created serious dislocations in the Liberian economy, ultimately leading to the official adoption of the US dollar in 1943. The story of Liberia illustrates the long‐standing challenges of globalization for peripheral economies and suggests the need for a reassessment of the origins and impact of colonial monetary regimes.

Doctrinal Determinants, Domestic and International, of Federal Reserve Policy 1914-1933

This paper describes the doctrinal foundations of Federal Reserve policy from the establishment of the institution through the early 1930s, focusing on the role of international factors in those doctrines and conceptions. International considerations were at most part of the constellation of factors shaping the Federal Reserve’s outlook and policies even in the high gold standard era that ended in 1933. However, neither was the influence of international factors absent, much less negligible. Nor were the Fed’s policies without consequences for the rest of the world. Having described the doctrinal foundations of Federal Reserve policy, I analyze how the doctrines in question influenced the central bank’s actions and shaped the impact of monetary policy on a number of key occasions, focusing in particular on episodes where the international economy and the rest of the world played an important role.

A New Characterization of Gold as Store of Wealth Across Monetary Standards and in a Global Crisis

A new hypothesis is set forth regarding what it means for gold to be a store of wealth. This property is contingent on the type of monetary standard. Gold is a store of wealth in a Gold Standard when the value of a perpetuity paying one unit of gold-compensated currency (Fisher, 1912) is constant. In a fiat economy, gold fulfills its store of wealth property when the value of a gold perpetuity (consol) is constant in real terms. We provide a resolution for the so-called Gibson Paradox (Keynes, 1930). That is, gold serving as store of wealth is fully compatible with the observation that nominal interest rates were co-moving with the general level of prices during the Gold Standard era. We also provide a method for valuing gold in a fiat money economy with Treasury Inflation Protected Securities (TIPS) as an alternate store of value/safe-haven instrument. The valuation result is applicable to a large economy like the US economy with a global reserve currency. We track the price of gold in US dollars on a daily basis during the US financial and Eurozone crises from July 2007-January 2012, with a mean absolute percentage deviation of 21% and 80% adjusted R2.

Law and the Financial Crisis: Searching for Europe's New Gold Standard

AbstractThe role of law in the governance of the Eurozone confronts divergent economic and political perspectives which are reminiscent of the gold standard era. The Maastricht model sought to use to law to create a sound currency. In practice, fixed exchange rates caused large trade imbalances and risky cross‐border investments resulting in a Eurozone‐wide crisis of first private, and then later, public insolvency. In the face of continued political unwillingness to either pool fiscal resources or impose massive austerity and structural reform, the European Central Bank ECB has been forced to become lender of last resort to sovereigns to maintain the single currency. Ordo‐liberal critics argue that the ECB has created a transfer union in breach of the Maastricht agreement. Keynesians, by contrast, argue that, just as under the gold standard, using ‘constitutionalised’ austerity to rebalance trade is neither just nor credible. The Eurozone's reliance on law and markets above developed political institutions has failed, but no democratically legitimate process has replaced it.

Harvests and Financial Crises in Gold Standard America

Most American financial crises of the postbellum gold standard era were caused by fluctuations in the cotton harvest due to exogenous factors such as weather. The transmission channel ran through export revenues and financial markets under the pre-1914 monetary regime. A poor cotton harvest depressed export revenues and reduced international demand for American assets, which depressed American stock prices, drained deposits from money center banks and precipitated a business cycle downturn—conditions that bred financial crises. The crises caused by cotton harvests could have been prevented by an American central bank, even under gold standard constraints.