Fiat money vs gold standard

Gold Standard Does Not Always Bring Credibility

Gold Standard Does Not Always Bring Credibility

... Monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.

Adopting a new gold standard, or some other hard currency peg, is often touted as a good way for poor, developing nations to attract foreign investors. But if the last era of globalization is any guide, the benefits of doing so are nil. Rather than a "good housekeeping seal of approval," adoption of a gold standard by the poorest developing countries a century ago served as a "thin film" of credibility -- and foreign investors often saw through such maneuvers, according to Niall Ferguson and Moritz Schularick writing in The "Thin Film of Gold": Monetary Rules and Policy Credibility in Developing Countries (NBER Working Paper No. 13918).

This study challenges research over the past decade that has suggested that, prior to World War I, the gold standard helped nations who adopted it because they could borrow money at lower interest rates than countries that didn't use the standard. By examining interest rates and economic control variables for 57 countries from 1880 through 1913 (more than twice the number of countries examined in previous studies), the authors found that while developed nations did see a benefit from adopting the gold standard, developing nations did not. "History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors," they conclude.

In the late nineteenth and early twentieth centuries, the world saw a spate of globalization that in some ways rivals today's global capital flows. By 1913, foreign investments in Argentina, Chile, and South Africa stood at around 200 percent of those nations' gross domestic product (and at 100 percent or more for the GDPs of Brazil, Mexico, Egypt, and Malaysia), roughly twice the levels of today. Some 40 percent of Britain's capital flows between 1880 and 1913 went to countries other than the comparatively rich settler economies. Today, only 10 to 15 percent of global capital market flows go to less developed nations.

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