Toward a “rules-based policy of the kind that has worked in the past.”

Originally posted Tuesday, April 24, 2012

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 “[T]he Federal Reserve should move to a … more rules-based policy of the kind that has worked in the past.”

So observes Prof. John Taylor, of Stanford, in The Wall Street Journal. 

Prof. Taylor thereby invites a most interesting conversation.

What kind of policy has worked in the past?  What is the empirical evidence?

The late Roy Jastram, professor in the School of Business Administration, Berkeley, from 1946 through 1982 is widely recognized as one of the greatest scholars of the empirical data relating to the performance of monetary standards in practice.

On December 2, 1981, not long after testifying before the U.S. Gold Commission, Prof. Jastram addressed the Security Analysts Society of San Francisco.

This is, in part, what he said:

“Let me start with some startling statistics.

“From the time the United States went off the gold standard in 1933 the wholesale price level has gone up by 760%. Since England abrogated the gold standard in 1931 her price index number has risen by over 2000%.

“Before that the two countries had a combined history of 350 years of long-run price stability. The price level was the same in the United States in 1930 as it had been in 1800. In England the price index stood at 100.0 in 1717 (the first year of her gold standard) and it was at that figure again in 1930.

“I am here today as an analyst, not as an advocate of a single point of view. I do not believe that a return to a gold discipline would be a magic cure for all economic ills. Nor do I take the opposite extreme of blaming on a Gold Standard every economic ill that humanity was heir to during its tenure. Instead, I would like to take some time to sum up, very briefly, the conclusions I have reached based on my years of research leading to two books on the precious metals, The Golden Constant and Silver: The Restless Metal (John Wiley & Sons, New York).

“Let me state first my position on monetary reform:

1. There must be a discipline over the money supply.

Nearly everyone agrees with this in the abstract. Disagreement arises over the question of at what levels and how to exercise the discipline.

2. Attempts at monetary discipline when managed by men have not worked.

I am not referring solely to the history of the United States. The same observation can be made for England, Germany, France, Italy and Japan. The only exceptions were draconian measures ending brief periods of crisis.

3. Therefore I believe there must be management by law, not by men.

An example of what I mean by “law” is that currency must be convertible into precious metal at a price fixed by law, with a legal reserve in place to guarantee conversion.
One example of managerial judgment by men is when a governing board selects target interest rates or target growth rates, in selected definitions of money supply and make continuing judgments of appropriate open market operations to try to hit these targets.

(Here I am not singling out our present Federal Reserve Board. I believe they have the best record of restraint in this country in modern times.)

4. Those monetary laws that worked best throughout history have been based upon the discipline of the precious metals.

Notice that I am not saying that whenever the system was based on precious metals it was stable; I am saying that when in history we find long-run stability of prices we find precious metals standing behind it.

5. The precious metal that has had the most successful experience in stabilizing price levels is gold.”

In moving the national (and world) conversation about monetary policy toward a consideration of the virtues of a rules-based policy, as Prof. Taylor does, we invoke the work of Prof. Jastram the better to give consideration to what the data show as the “rules-based policy of the kind that has worked in the past.”