9/02/2019

On Targeting the Price of Gold

"Answering the first question is relatively easy. Despite what Jay Powell suggested, reviving the gold standard and having the Fed target the price of gold aren’t the same thing. So far as most fans of the gold standard are concerned, in a genuine gold standard paper money consists of readily redeemable claims to gold; and it’s that redeemability—and not any central bank “targeting”—that keeps that paper on a par with the gold it represents.

At a still more fundamental level, a true gold standard is one in which paper money consists of legally-binding IOUs, exchangeable for definite amounts of gold, not as a matter of policy, but as a matter of contract. Making the equivalence of paper money and gold a matter of binding contracts, enforceable in ordinary law courts, rather than one of pledges made as a matter of public policy, makes that equivalence especially credible. The sovereign immunity enjoyed by most modern central banks, in contrast, renders them unfit to operate genuine gold standards even when their notes are officially redeemable in gold, because they can always change their policy, dishonoring a prior redemption pledge, with impunity. (Every older central bank has, in fact, done just that at some point in its history.)"