Josh Barro and the Gold Standard

A few days ago, when it was announced that former Cato Institute president John Allison was under consideration for treasury secretary, Josh Barro of Business Insider dismissed the man as a “nutcase”. Why? Because Allison believes that the Federal Deposit Insurance Corporation (FDIC) generates a moral hazard that contributes to financial crises (a statement I agree with).

This slur irked one of the economists at Cato, George Selgin, who took to twitter to challenge Barro. In the exchange, at one point, Barro indicated that the desire of libertarians to return to the gold standard confirms the “nuttiness” of libertarians and the people at Cato.

And here, Barro allows me to make a comment on the gold standard. The sympathy towards the gold standard is not sympathy towards gold per se, but rather sympathy for reducing the capacity of governments to exercise discretion. Basically, each time you hear some academic economist mention the gold standard, what that economist means is rules-based monetary policy.

The gold standard era (1875-1914) was not an image of perfect monetary policy. It is not a lost paradise that we ought to strive to. However, the implicit rules imposed by the system did favor more stability that would have been the case with discretion during that era. In fact, the era of central banking with the Federal Reserve has not been that great relative to the gold standard era (and in the world of central banks, the Fed is pretty good). A lot of the scorn that the gold standard era has received had to do with regulatory policy towards banks (notably regarding restrictions on branch banking which forced more volatility) or with the role of changes in international demand for assets (see here). Thus, in spite of its many flaws, the gold standard was not that bad (but it was not* gold per se that was helpful – it was the shunning of discretion by governments).

To be sure, I do not favor a return to a gold standard era. What I do like, and what I think John Allison likes as well, is the return to rules-based monetary policy. Josh Barro should have been intellectually generous and understand this key distinction. By not making that distinction, of which he must be aware given his background, he debased the debate over monetary policy.

5 thoughts on “Josh Barro and the Gold Standard

  1. A rules-based policy begs several questions. Who makes the rules? Are they immutable? What if new forms of money arise? No government can tie its own hands as witness the failure of the Constitution to constrain leviathan government.

    I favor abolition of monetary policy: an end to all government interference in the business of creating money and offering it in the marketplace. With private provision of money it is likely but not inevitable that gold would return to prominence.

    You are quite right that the gold standard era was hampered by policies such as prohibition of branch banking and bond collateral requirements. As for the Fed, its record has been dismal. Give them a point for the Great Moderation, but otherwise the Great Depression, the 70s inflation, and the 2008 crisis mark the Fed as a failure. See Selgin and White, “Has the Fed Been a Failure” at

  2. A) The Fed has been dismal relative to non-central banking arrangements; amongst central banks, its fairly good
    B) I see this as a spectrum of “terrible” to “ideal model of money” aware that I will never get the extremes of that spectrum. In such a framework, even imperfect rules are a marginal improvement over discretion.
    C) Except Calomiris and others, there is a need for a massive “economic history of financial instability” in the US from a “free banking” perspective.

  3. Should “but it was gold per se that was helpful” read “but it was not gold per se that was helpful”?

Please keep it civil

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