Is There Such a Thing as a Free-Market Gold Standard?

"Greg Ip's claim that "Even on gold, central bankers still had to decide interest rates." That claim would have merit if all the nations that took part in the classical gold standard (1871-1914) had central banks. In fact, most didn't. As the following chart, reproduced from a BIS publication, shows, the vast majority of today's central banks were established after the classical gold standard era. Gold standard nations that lacked central banks throughout the classical gold standard era included the United States (one of the "core" nations), all of the British Dominions save Australia (which only established a central bank in 1911), Greece, Turkey, the Philippines, Thailand (Siam), and all of Latin America. Because the Swiss National Bank wasn't up and running until 1907, Switzerland also lacked a central bank for most of the classical gold standard era.

That some gold standard nations lacked central banks doesn't necessarily mean that the governments of those nations didn't manage or manipulate their gold standards, by setting interest rates or otherwise. In the the United States, for example, Civil-War era currency and banking reforms resulted in a notoriously "inelastic" currency stock. Thanks to that, and to other legal restrictions, including barriers to branch banking and minimum bank reserve requirements, U.S. interest rates were notoriously unstable, with a tendency to rise, sometimes sharply, every harvest season. To combat that tendency, Dick Timberlake explains, during his tenure as Secretary of the Treasury (1902-1907) Leslie Shaw made a point of transferring sub-treasury gold to national banks as the demand for currency and bank credit reached its seasonal peak. Shaw's actions showed that governments don't have to rely on central banks to deliberately influence interest rates.

But the U.S. was only one of many classical gold standard participants that had no central bank. In others, government influence on interest rates and other monetary magnitudes was practically absent. Canada is a good example. There interest rates were relatively stable, not because the Canadian government interfered to make them so, but because Canadian officials avoided the sort of harmful interference that destabilized U.S. rates. In particular, they allowed Canadian banks to branch freely, and to issue notes backed by their general assets (and not solely by government securities, as in the U.S.). And although entry into the Canadian banking system was limited by would-be bankers' need to secure government charters, bona fide applicants were never turned down so long as they met minimal capital requirements that were relatively modest until 1890."