Why do economists who advocate a monetary policy oppose the gold standard?

Prof. Larry White wonders about the question.

He says the reason is economists (macro ones) see central banks as their main recruiters. The central banking jobs also come with quite a few privileges and reputation. Moreover, economists see themselves as social engineers whose designed policies/rules can benefit society. In a way it double standards of sorts as same economists talk about markets as well.

Why isn’t the gold standard more popular with current-day economists? Milton Friedman once hypothesized that monetary economists are loath to criticize central banks because central banks are by far their largest employer. Providing some evidence for the hypothesis, I have elsewhere suggested that career incentives give monetary economists a status-quo bias. Most understandably focus their expertise on serving the current regime and disregard alternative regimes that would dispense with their services. They face negative payoffs to considering whether the current regime is the best monetary regime.

Here I want to propose an alternative hypothesis, which complements rather than replaces the employment-incentive hypothesis. I propose that many mainstream economists today instinctively oppose the idea of the self-regulating gold standard because they have been trained as social engineers. They consider the aim of scientific economics, as of engineering, to be prediction and control of phenomena (not just explanation). They are experts, and an automatically self-governing gold standard does not make use of their expertise. They prefer a regime that values them. They avert their eyes from the possibility that they are trying to optimize a Ptolemaic system, and so prefer not to study its alternatives.

The actual track record of the classical gold standard is superior in major respects to that of the modern fiat-money alternative. Compared to fiat standards, classical gold standards kept inflation lower (indeed near zero), made the price level more predictable (deepening financial markets), involved lower gold-extraction costs (when we count the gold extracted to provide coins and bullion to private hedgers under fiat standards), and provided stronger fiscal discipline. The classical gold standard regime in the US (1879-1914), despite a weak banking system, did no worse on cyclical stability, unemployment, or real growth.

Hmm..Trust Friedman to say this.

He takes on all the critiques of gold standard. He adds much of the problems attributed to the Gold standard especially during Inter-War years and Great Depression were due to policies of central banks and not the fault of the rule.

These debates have been there for a while and continue to be fascinating..


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