Gold standard has been often claimed to be the liberal panacea as regard to monetary regimes. I myself believed it for quite a long time. However, the study of monetary history in a broader and longer perspective has made me change my mind on this question. In relation to the gold standard, Milton Friedman (1) made a very interesting critique from a liberal perspective in the paper presented at the Mont Pelerin Society in 1961. His work, “Real Versus Pseudo Gold Standards” is a true challenge for all those who beleive that the classical gold standard was (and still is) a panacea. As Friedman remarked, it is difficult for a pro free-market economy to put the label of “liberal” to a monetary regime in which the State fixed the price of one specific good (in this case, the covertibility rate between the bank notes and the gold held by the central bank). In his view, the belief of the classical gold standard as part of the main liberal body of theories is the result of the traditional involvement of the State in the monetary field; as a result, we cannot even think of a monetary system in which the price of gold were not determined by the State, but by the competitive dynamic of different issuers of bank money and money holders themselves.
And this is the sort of the debate that I introduced in the last meetting of the “ANR DAMIN” Project (coordinated by Prof. Georges Depeyrot, CNRS, Paris), entitled Silver Monetary Depreciation and International Relations, hold in Paris last January. It was an extraordinary meeting with experts and very good colleagues in the area of contemporary monetary history; and my proposal to talk about a competitive gold standard monetary system was received with some surprise at first. Then, once the question was properly set and introduced, we did develop a very interesting debate on the feasability of a monetary regime not necesarilly monopolised by the State; one in which, different issuers of paper money, backed with gold, were able to compete to provide the best means of payment. Under this system, as Friedman masterly stated, there is no need to claim for a fixed priced for gold, as its price will vary in the market everyday according to its demand and supply(ies).
Let me clarify that, even though under the control of the State, I do take the classical gold standard as a stable monetary system, with a remarkable record of long term price stability and economic growth from 1870 to 1914. And this is much more the case in light of the much more discretionary monetary regimes that we have experienced since the abandonment of the gold standard in the last century; under purely fiat monetary systems, we have seen during the so-called “Keynesian years” how money supply was taken as another tool in the hands of the policy-makers to finance excessive and recurrent fiscal deficits, with the expected and undesirable results in terms of higher and more volatile inflation, and thus more uncertainty in the markets.
The debate can be found in the following link: http://www.anr-damin.net/spip.php?article31#outil_sommaire_1
(please, go to the last Saturday video, “Final Debate of the Round Table”; the debate on this question is in the middle of the recording)
(1) I am grateful to Prof. Pedro Schwartz for his suggestion to read it several years ago.