Cato Journal: “Toward a Global Monetary Order”

Originally posted on Tuesday, May 7th, 2013

The Spring/Summer 2012 issue of The Cato Journal is devoted to the topic of “Monetary Reform in the Wake of Crisis.”  It contains sixteen articles by distinguished thought leaders such as Robert B. Zoellick, Allan H. Meltzer, John A. Allison, George Melloan, James Grant, Benn Steil, George Selgin, Judy Shelton, Richard H. Timberlake, Kevin Dowd, Ron Paul, Lawrence H. White, and Gerald P. O’Driscoll Jr.

Gerald P. O’Driscoll, courtesy of Cato Institute

O’Driscoll, a Senior Fellow at the Cato Institute is a former Vice President at the Federal Reserve Bank of Dallas.

He contributes the concluding essay, Toward a Global Monetary Order, observing, at p. 445 – 446:

The Way Forward

Steil and Hinds (2009) emphasize that the gold standard was the monetary system compatible with the classical liberal order— namely, with free trade and free capital movements. That order worked because governments were much smaller than today (about 10 percent of GDP). This realization led Steil and Hinds (2009: 239–39) to shy away from the logic of their own argument, which is a return to the gold standard. In much the same fashion, Hayek (1937) deferred to what he thought was politically possible and did not follow his own logic.

I don’t know what is politically possible, nor do most economists. There is nothing in the training of economists that provides that expertise. I do know that economic freedom and political freedom are systematically related. To maintain the classical liberal order requires the monetary arrangements congruent with that order (O’Driscoll 2012). That system is the classical gold standard.

The structure of the banking system matters. But adoption of the gold standard is a key for restoring monetary discipline and a free monetary order. A gold standard accomplishes two goals (1) it constrains a central bank from offsetting good, productivity-driven deflation, and (2) it makes bad deflation less possible. Yet, a gold standard doesn’t solve all problems. Restoring a commodity stan- dard is a necessary, but not a sufficient condition for monetary reform.

The argument for gold is not that it is a perfect monetary system. There is no such thing. The most basic argument for a commodity standard is a Public Choice one: it constrains the ability of the fiscal authority to spend. If there is a central bank, a commodity standard prevents the kind of wholesale monetization of government debt that is now occurring in developed countries.