Russell and Duenes

Milton Friedman on the gold standard

with 3 comments

In his book Capitalism and Freedom, Milton Friedman writes at length about commodity standards such as the gold standard. I quote him at length.

If an automatic commodity standard were feasible, it would provide an excellent solution to the liberal’s (i.e., classic liberal) dilemma: a stable monetary framework without danger of the irresponsible exercise of monetary powers. If, for example, an honest-to-goodness gold standard, in which 100 percent of the money in a country consisted literally of gold, were widely backed by the public at large, imbued with the mythology of a gold standard and with the belief that it is immoral and improper for government to interfere with its operation, it would provide an effective guarantee against governmental tinkering with the currency and against irresponsible monetary action. Under such a standard, any monetary powers of government would be very minor in scope. But…such an automatic system has historically never proved feasible. It has always tended to develop in the direction of a mixed system containing fiduciary elements such as bank notes and deposits, or government notes in addition to monetary commodity. And once fiduciary elements have been introduced, it has proved difficult to avoid governmental control over them, even when they were initially issued by private individuals…Once fiduciary elements have been introduced, the temptation for government itself to issue fiduciary money is almost irresistible. In practice, therefore, commodity standards have tended to become mixed standards involving extensive intervention by the state…Even during the so-called great days of the gold standard in the nineteenth century, when the Bank of England was supposedly running the gold standard skillfully, the monetary system was far from a fully automatic gold standard. Even then it was a highly managed standard. And certainly the situation is now more extreme as a result of the adoption by country after country of the view that government has responsibility for ‘full employment.’ [A gold standard] is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States.” (pgs.41-42)

Of course I would be happy to summarize Friedman’s “specific” evidence from United States history in a subsequent post. But I think this explanation by Friedman should give readers something to chew on in light of my colleague’s previous post.


Written by Michael Duenes

August 4, 2009 at 4:39 am

Posted in Duenes, Economics

3 Responses

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  1. I think I said what I wanted to the first time I wrote about this. I don’t agree with Friedman because of the lack of a standard and the modern historic implications and results are obvious: we have a massive recession that is nearing depression and I blame the lack of a Gold Standard for much of it. We have been following the Friedman model for a long time and it fluctuates too much. As for why the U.S. abandoned the Gold Standard: so that people could begin to live above and beyond their means. In actuality, bankers suspended the “idea” of the Gold Standard in the mid-to-late 1920s. If the Gold Standard was kept, banks would not have lent more money than they had. This was key to causing the Depression. During the Depression, the reason why the Gold Standard was suspended was so banks could continue to lend money in large numbers, often to people who couldn’t pay it back. This is a major reason why the Depression continued into the late 1940s. This move had very little to do with the United States economic recovery. Remember, Herbert Hoover’s attempts to “cure” the Depression in the 1930s AFTER the Gold Standard was suspended were failures. It took WWII to bring us out of Depression. So much of our casual spending and credit problems today are due to the banks being able to lend without a standard. Then when the banks fail, the taxpayer bails them out. As I said before, I don’t know if gold has to be the standard, but I’m not sure what else would suffice.


    August 4, 2009 at 4:29 pm

    • Actually we haven’t been following the Friedman model at all because Friedman advocates laws which would control monetary policy rather than men within the Fed like we’ve had since early last century. Friedman’s model has not been tried, of course. You are probably correct that we abandoned the gold standard because we wanted to spend beyond our means. The need for a standard is clear, but you have not made the case as to why it has to be a particular commodity. The lack of a gold standard is not the problem. The tinkering by various federal agencies which allow for great manipulation of the money supply is the problem. As Friedman says, we’ve never really had a 100% gold standard in real life practice, and there is no chance we’re going to get one now. So what you’re really advocating is a mixed system, are you not? And if it’s mixed, then the government still retains power to manipulate the money supply, causing the problems we have now.



      August 5, 2009 at 2:42 pm

  2. […] gold standard. Milton Friedman stated in Capitalism and Freedom that the gold standard is neither feasible or desirable. A more attainable approach would be what John B. Taylor advocates, which is to do away with the […]

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