I have written before about the problems surrounding the inflexibility of a gold standard (see previous posts here and here). Now comes an NBER working paper by Douglas Irwin entitled Did France cause the Great Depression? Here is the abstract:
The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.Brad DeLong also put up a chart showing that the French were the last to emerge out of the Great Depression. Was it because of their stubborn embrace of the gold standard?
In Peter Bernstein's important work entitled The Power of Gold, which discusses the history of gold and the story of other commodity backed currencies, the author appears to be relatively agnostic over the issue of the value of a gold standard.
I believe that the role of gold and other commodities in a global economic system is to act as a sentinel for central bankers. Bullion seems to be acting as an alternative currency - a barometer of confidence in fiat currencies. Former Fed Chairman Alan Greenspan recently spoke at the Council of Foreign Relations on this very issue. The NY Sun reported that:
“Fiat money has no place to go but gold,” the former Fed chairman said at the Council, according to economist David Malpass, who quotes Mr. Greenspan in one of Mr. Malpass’ emails on the political economy. Mr. Malpass writes that the former chairman of the Federal Reserve’s board of governors was responding to a question in respect of why gold was hitting new highs.Market sentinel and canary in the coal mine? Yes.
Mr. Greenspan replied that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out,” as Mr. Malpass characterized Mr. Greenspan. “He’d concluded that gold is simply different,” Mr. Malpass wrote. At one point Mr. Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes. Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”
A gold standard for currencies? No. It's too inflexibile and creates too much economic volatility.