Is a Gold Standard Necessarily Vulnerable to Speculative Attacks?Future of Money, Resources — By Theodore Phalan on December 18, 2012 at 12:46 PM
by Lawrence H. White
|My frequent co-author George Selgin (2012) finds it “more doubtful [today] than ever before that any government-sponsored and administered gold standard will be sufficiently credible to either be spared from or to withstand redemption runs.” He quotes James D. Hamilton (2005) to similar effect: given that central banks the Treasuries on the gold standard can and often have left it, and given “that speculators know this,” it follows “that any currency adhering to a gold standard will…be subject to a speculative attack.” Selgin adds: “The breakdown in the credibility of central bank exchange rate commitments since World War I cannot be easily repaired, if it can be repaired at all.”I pretty much agree with this (Hamilton’s “any currency” is too sweeping), and I agree with the lesson Selgin draws. Namely, that the non-credibility of a government central bank’s promises to stay on the gold standard is not a case against the gold standard but a case against combining the gold standard with central banking. Because a typical central bank has a legal monopoly of currency notes denominated in the local monetary unit, it has the power to devalue or to take the economy entirely off the gold standard by ending gold redemption of its liabilities. The devaluation or departure from gold can be coordinated with the Treasury, which has a legal monopoly on coins.
A more durable and credible approach to sustaining the gold standard is to let the private sector competitively issue currency. Private firms in a competitive market are more strongly committed to gold redemption for two reasons: they can be legally held to their promises (unlike central banks, which enjoy sovereign immunity from lawsuits over devaluation or non-redemption), and they need to compete for customers who can go elsewhere by avoiding practices that raise their risk of not being able to redeem. If any single bank among dozens fails or suspends payment, the gold standard survives. Free banking thus delivers a more robust and sustainable gold standard (Selgin and White 2005). …