Over at his recently established blog “Uneasy Money,” David Glasner has a post on “Gold and Ideology.” (He has started fast out of the gate, writing prolifically; I hope he doesn’t burn out, but there’s a lot to write about when the subject is money.) He claims that “the gold standard never managed itself; in its classical period from 1870 till World War I it was under the constant management of the Bank of England with the occasional assistance of the Bank of France and other major banking institutions.”
I disagree. First, it is a mistake to begin in 1870. The gold standard is centuries older, and countries that were not on the gold standard before the late 1800s, such as Germany and India, were generally on the silver standard, which works on just the same principles. So when we discuss the gold standard, we are discussing a system whose roots stretch into antiquity, not one that lasted less than half a century.
Second, every study I have read about the gold standard acknowledges that the pre-World War I version worked much better than the interwar version, and at least in some respects better than the post-World War II Bretton Woods version. But hardly anybody has expressed clearly what I think is the reason for the differences in performance: the pre-World War I standard was much less heavily managed than the subsequent versions. Many countries did not have central banks. Instead, they had free banking or highly rule-bound government issuance of currency. These cases included three of the world’s largest economies: the United States, China, and India. The central banks of the era were typically fully or partly privately owned, and aimed at making profits rather than at managing the economy, although at times, especially during crises, they did act in what they perceived to be a broader interest. The spread of central banking was the other side of the coin of the decline of free banking: by the end of 1935, free banking had shrunk to such a point that the most important place where it still existed was Venezuela.
John Maynard Keynes called the Bank of England the “conductor of the international orchestra” of the pre-World War I gold standard. I prefer a different metaphor, from a kind of music that I suspect Keynes had little use for. The pre-World War I gold standard was more like a jazz jam session, where the players were riffing variations on a standard tune. The Bank of England was the piano player, who had a major role but did not conduct the session. The piano player was sometimes off key, making the music sound discordant. A number of major financial crises in the 19th century originated in England. Before 1845, when Scotland had free banking while England had central banking, the crises were more severe in England. Central banking, even though less oriented at overall economic management than it later became, seems to have been a destabilizing rather than a stabilizing force.
Since this is a post, not an essay, that’s all for now. I will return to the subject later.