Tyler Cowen sends us to an interesting paper by Doug Irwin on the gold standard and the Great Depression. This paper shows via a counterfactual exercise that had the United States and France not sterilized their large gold inflows the price-specie-flow mechanism would have worked its magic and the world would have avoided the destructive deflations of 1929-1933. Others have made this argument before, particularly advocates of the gold standard. They contend that it wasn't the gold standard per se, but the failure of the U.S. and French monetary authorities to play by the "rules of the game" for the international gold standard (i.e. they should not have sterilized their gold inflows). So let's do our own counterfactual: what if the rules of the game had been followed and, as a result, the Great Depression had been avoided across the world in the 1930s. How would the world be different today?
There are probably a thousand different answers one could give--Peter Temin and Barry Eichengreen argue the Nazis would not have risen to power in Germany--but I want to focus on just one possibility: we could still be on the gold standard today. Had this happened what else in monetary history would be different? Would the Great Inflation of the 1970s been avoided? If so, then Paul Volker wouldn't be the legend he is today because there would be no inflation monster for him to slay. Presumably, under such a system the Fed would not have helped fuel a housing boom in the 2000s. With a gold standard, it also seems the Fed would be smaller and the Fed chairman wold be less important--no Greenspan Maestro. Similarly, there would be little-to-no uncertainty over FOMC meetings since their decisions would largely be driven by the gold standard. We wouldn't be worked up over the Senate's delay of the President's Fed appointments since they really wouldn't matter. In many ways it seems that there would be more certainty in this system than what we have under current arrangements. On the other hand, there is no reason to believe in this counterfactual that all nations would continue to play by the rules of the game necessary for an international gold standard to work. And it is not clear that the painful price adjustments required in a gold standard from a money demand shock would be politically feasible forever (of course it such price adjustments were common then maybe prices would be more flexible). In short, one could easily construct a gold standard scenrio where things go terribly wrong again at some later date.