While I remembered to highlight the trade-off between short-run volatility and long-run stability towards the end of my previous post on the same topic, I thought it is important to stress this. Some very thoughtful comments have also appeared on the previous post. It is true that no system is perfect inasmuch as they are managed by human beings. But, humans do chain themselves in order not to cause harm to themselves. These are self-disciplining devices. They apply to individuals, to institutions and to sovereigns. A Gold Standard (or, whatever standard) is such a disciplining device.
Keynesians should not forget that while Lord Keynes preferred that governments, answerable to the people, have the freedom to take counter-cyclical action, he made sure that, in his post-World War II economic architecture, that there was no place for free and unrestricted capital mobility. He saw it as much of a constraint on policymakers as the gold standard was. He was intellectually consistent.
Per contra, gold standard saw free and unrestricted capital mobility.
I think, post-1980s, we have the worst of both worlds. No surprise that we eventually reached the world of zero interest rates and quantitative easing. We are not done yet.
I have digressed far. But, the point of the digression is to say that while it is true that no system is perfect, it is equally true that some are more imperfect than others.
Specifically, on the short-run volatility thing, here is an interesting and pertinent observation by Charles Goodhart. I take the paragraph below from the speech delivered by Jim Grant to the Federal Reserve Bank of New York:
I commend to the Federal Reserve Bank of New York Financial History Book Club (if it doesn’t exist, please organize it at once) a volume by the British scholar and central banker, Charles Goodhart. Its title is “The New York Money Market and the Finance of Trade, 1900-1913.” In the pre-Fed days with which the history deals, the call money rate dove and soared. There was no stability—and a good thing, Goodhart reasons. In a society predisposed to speculate, as America was and is, he writes, unpredictable spikes in borrowing rates kept the players more or less honest. “On the basis of its record,” he writes of the Second Federal Reserve District before there was a Federal Reserve, “the financial system as constituted in the years 1900-1913 must be considered successful to an extent rarely equaled in the United States.” And that not withstanding the Panic of 1907.
It would be good for us to get hold of that book if we are interested in the subject of sound money and would like to form informed views on whether policymakers’ discretion and freedom are worth having.
Two links, lest we forget. One on Greenspan and one on the analogy of controlled avalanches in ski slopes. The latter is relevant to the discussion of short-run volatility (small, controlled avalanches) vs. long-run stability (no avalanches except the one that buries all skiers in the end). Both have been flagged in TGS before. But, some things are worth repeating.