Posted by: Dirk | November 24, 2010

The euro, the gold standard and the problem of external adjustment revisited

A year ago, I wondered whether the euro would act like the gold standard during the Great Depression. It is one of my longest blog posts ever and cannot be summarized in a few sentences. Or, maybe it can, but at least I would need considerable time in order to do that. Since I still like that post, though, I would recommend to read it whole.

However, there is an alternative now. You might want to look at Peter Temin and Barry Eichengreen’s Fetters of Gold and Papers at NBER (downloadable version here). This is the abstract:

We describe in this essay why the gold standard and the euro are extreme forms of fixed exchange rates, and how these policies had their most potent effects in the worst peaceful economic periods in modern times. While we are lucky to have avoided another catastrophe like the Great Depression in 2008-9, mainly by virtue of policy makers’ aggressive use of monetary and fiscal stimuli, the world economy still is experiencing many difficulties. As in the Great Depression, this second round of problems stems from the prevalence of fixed exchange rates. Fixed exchange rates facilitate business and communication in good times but intensify problems when times are bad.

Well, although I can forget about publishing my post in paper form, I am quite happy that people like Eichengreen and Temin attacked this issue. Having looked through the paper in fast-forward, I think I will agree with much of it. The price levels are wrong and their stickiness is a drag on the world economy since it slows down adjustment. In the next days, I will post a BoP accounting view of the Irish situation which should explain this in more detail. If you can’t wait, read my old post from November 2009.


  1. Looks like Prof. Eichengreen stole your blog then! LOL. But Eichengreen is wrong about what happened in the late 20s and 30s with gold. You see, it was not really a free market in gold–gold could only be exchanged between banks, in large bars, not bullion coins. Transportation of money was limited. Hence game theory took over. You had a limited number of players (countries, central banks) and thus it was not really a free market, hence it was “fettered” (to play on Eichengreen’s title) by laws and rules.

    A true gold market would have no central banks. No Fed. Google George Selkin. Free banking. No FDIC insurance. And BTW loans and compound interest are evil. Yes, they encourage sticky prices, unlike stocks. Think about this and blog on it. It’s the next Nobel Prize in Economics, and it can be yours.

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