Austin Lindsey ECON 4514 Professor Keay Critique 2 Critique of Gold Standard Throughout his work Gold Standard,

Lawrence Officer discusses the gold standards use from 1879 to 1914, dubbed the classical period, and also its use from 1926 to 1931, the interwar period. His primary goal for the paper is to describe the gold standard, its revival, and its ultimate collapse. Officer begins by noting the differences types of gold standards. For example, a country could use either a pure coin gold standard or a mixed gold standard. In the former type of system, gold is the only money. The later type uses both gold coins and paper currency as money. He then states that the systems share several important traits: monetary units (e.g. USD) must have a well-defined fixed gold content, gold is acceptable tender in all transactions, private gold is convertible into equivalent amounts of gold coin, and private parties have no restriction on their use of gold coins. These characteristics provide some stability to gold standard systems. Many countries used the gold standard, and the fixing of each currency in terms of gold effectively meant fixed exchange rates as well. However, the many costs associated with using gold as a currency (insurance, transportation costs, ect.) could fluctuate. Arbitrageurs would take advantage of any disparities, giving upper and lower bounds for each currency pair. The limits are due to the aforementioned costs. Officer then briefly discusses central banks and their roles within the system, primarily to reinforce gold flows (e.g. reduce money supply when there are gold

outflows rather than maintain money supply by purchasing more gold). Many countries did not follow this rule, though; in fact it was more the rule to sterilize flows. It seems as though this non-adherence to policy rules should affect the stability of the gold standard system. According to Officer, the stability of the system was actually largely due to trust. The private sector strongly believed it had convertibility into gold, and in fact wrote many contracts in terms of gold, which provided an incentive to keep a gold standard. In addition, financial crises were mild and infrequent, making the possibility of the need for a rapidly expanding money supply appear remote. Equally as important was the fact that, because London had the most developed capital markets, peripheral countries could achieve the lowest cost of capital by also adopting and maintaining the gold standard. This provided further incentives to maintain the standard. The classical period came to an end as a result of the First World War and the Bank of Englands illiquidity (it did not hold enough gold). A run on the bank caused England to drop the gold standard. Despite financial market turmoil, most countries returned to the gold standard in between the two wars. The fashion and level to which each country readopted the gold standard (if they did at all) created a piecemeal system, which made the world capital markets unstable. In conjunction with separate reserve currency and gold holding distributions, the Great Depression put the end to the interwar gold standard. Officers approach to building an understanding of the gold standard was to show a large dataset describing when many countries used a gold standard,

exchange rates and exchange rate issues. He would then discuss implications of the data, in terms of characteristics of each period of the gold standard, use and adoption of the gold standard, stability of the gold standard, and the fall of the gold standard. The work has a couple strengths, but primarily it is a good description of the gold standard. Additionally, it provides excess color on the workings of the gold standard that assist in overall understanding of the topic. For example, Officers discussion of arbitrage opportunities is both interesting and important to an understanding of gold standard-era foreign currency exchange. Another key strength is the layout of how, both in the classical and interwar periods, the gold standard failed. The failure both times was caused by unusually high stress within the world wide financial system. Adding to this was the fact the Officer had pointed out that previously, the world was both peaceful and without financial crises. That said, Officers piece had some room for improvement. As opposed to using original or pre-existing research to derive ground-breaking work regarding the gold standard or further academias understanding of the mechanics of a gold standard, Officer is primarily summarizing the standard. That is not to say that his work isnt useful, rather that it could have gone the extra mile. The work would be stronger with more data points, both qualitative and quantitative. For example, he could have included anecdotal evidence regarding the failures of the gold standard to provide insight into issues faced while transitioning to a new monetary system. Additionally, data such as trade volumes, capital market size for core countries, and financial markets performance in each country could have been useful to

understanding golds role in the world economy and supported the reasons that the gold standard ultimately failed. It also seems that one interesting takeaway (with important monetary policy takeaways that can be supported with modern financial evidence), that the gold standard system, much like a deposit-taking retail bank today, is built on trust and the belief in convertibility, was not really identified as a main finding of the piece by the author. This appears to be the most important part of the issue with a gold standard, especially when seen in combination with the difficulty in quickly expanding the money supply, however Officer does not highlight it as such. This is the largest failing of the work, because instead of simply summarizing, he could have come forth with a readily usable conclusion. This essay contributes to a body of work, which includes The Gold Standard as a Good Housekeeping Seal of Approval, and many others cited in the essay. Some of the works were simply data archiving by various central banks, while some of it was more in depth analysis, as Bardo and Rockoffs aforementioned work was. It appears that Officers main addition to the existing body of literature was to assimilate it into a summary, while providing but not enhancing policy related conclusion. From Google Scholar, Gold Standard has inspired research into the differences between the classical and interwar periods, capital markets research for the same time periods, and research into gold standard policy and its stability and risks. This means that the lack of strong conclusions in Officers piece has perhaps been a positive, as many others have wrote about the several directions available to

further explore, presumably using officers piece as the groundwork for further investigation. This reading contributes to course material in largely indirect ways. We did not cover capital markets or the gold standard, and as such the reading provided insights on how they might operate. However, we did discuss different countries capital to labor ratios as well as examine how some countries were able to invest higher amounts of capital at higher rates of return than others. This reading contributes to that understanding by expounding the backbone of international capital markets. In addition, the transition from gold standards to other monetary standards (largely fiat standards) is a step towards a modern economy, and allows for the mitigation of crises, which allows for long-term, sustainable growth. That has been a main focus of the course, and even though the gold standard was not lectured on, it still provides information as to how countries economies developed into what they are today.