Sunday, August 16, 2020

Postscript to the New York Times' Critique of the Gold Standard: Banking Stability Under Fiat vs Gold

2 MIN READ - A quick postscript to the Cautious Optimism Correspondent for Economic Affairs’ recent critique of the New York Times’ own critique of the gold standard. 

Former Obama administration Treasury official and “Car Czar” Steven Rattner recently accused the gold standard of promoting financial instability and bona fide banking crises in contrast to the allegedly more stable fiat money standard managed by central bank technocrats and government regulators.

Perhaps Rattner should have read a little history before writing his column.

“Only five countries experienced severe waves of bank insolvency worldwide in the years 1875-1913.”

“Banking Crises Yesterday and Today" by Charles Calomiris, Columbia University

“According to Calomiris (2010) there were only 10 banking crises worldwide between the years 1875 and 1913, and five occurred in the United States” [1884, 1890, 1893, 1896, 1907: Correspondent’s note]

“Government-Cheerleading Bias in Money and Banking Textbooks” by Nicholas Curott and Ben Thrasher, Ball State University and Tyler Watts, Ferris State University

“Only 34 of those 117 countries [with population greater than 250,000] were crisis free from 1970 to 2010. Sixty-two countries had one crisis. Nineteen countries experienced two crises. One country underwent three crises and another weathered no less than four.”

“Fragile by Design: The Political Origins of Banking Crises and Scarce Credit” by Charles Calomiris, Columbia University and Steven Haber, Stanford University


The classical gold standard era: 38 years. Ten crises in five countries. 

The fiat money, central bank-managed era: 40 years. 107 crises in 83 countries.

It’s also worth mentioning that the world classical gold standard of approximately 1879-1914, while not a 100% perfectly free market system, was as close as the entire globe has ever come and would still be considered virtually laissez-faire by today’s regulation-happy politicians and mainstream economists. And the most regulated banking system in the industrialized world during that period by far was the United States. 

Most American banks were restricted from branching beyond their sole headquarters office making it impossible for them to diversify their loan portfolios and depositors.

Banks were forbidden from issuing paper currency without holding 111% the equivalent value of U.S. Treasury bonds—bonds that became increasingly scarce as the federal government paid down the national debt after the Civil War—thus creating regular currency shortages. 

Perverse regulations made the American banking system weak and inherently fragile. Thus it’s no coincidence that the USA accounts for a full half of only ten banking crises that occurred worldwide in the 1875-1913 period.

The Economics Correspondent’s original critique of the New York Times’ uninformed gold standard column can be read at:

For voracious readers the Economics Correspondent highly recommends Calomiris and Haber’s “Fragile by Design” which provides detailed introductions to the banking histories of the United States, Canada, England, Scotland, Latin America, explores the regulatory roots of the 2008 Great Financial Crisis, and analyzes the conflicting experiences of financial stability and crisis among the world’s nations.

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