The gold standard and other monetary regimes.

• Author: Bordo, Michael D.
• Position: Research Summaries

In recent years, my research has focused on three topics that I discuss here: the performance of the gold standard and its Bretton Woods variant; the gold standard as a rule - that is, as a credible commitment mechanism; and the performance of alternative monetary rules.

The Performance of the Gold Standard

and Bretton Woods Monetary Regimes

Under the classical gold standard, adherents' monetary authorities were required to fix the prices of their currencies in terms of a fixed weight of gold and to buy and sell gold freely in unlimited amounts. The pledge to fix the price of gold provided a nominal anchor for the international monetary system. Under the Bretton Woods system, in contrast, only the United States fixed the price of the dollar in terms of gold. All other convertible currencies were pegged to the dollar. Also under Bretton Woods, free convertibility of gold into dollars was limited. Thus, Bretton Woods was a weak variant of the gold standard.

Comparing the performance of a number of important nominal and real macro variables across four regimes (the classical gold standard, the interwar period, Bretton Woods, and floating exchange rates) for the G-7 countries, using annual data, reveals that the Bretton Woods system was the most stable for virtually every variable. The gold standard was second. Further, the Bretton Woods convertible period (1959-71) had the lowest standard deviation of both the inflation rate and the growth of real output.(1) Under the classical gold standard, the standard deviation of both variables was higher than under Bretton Woods and the recent float.(2)

Although the classical gold standard was not characterized by short-run price stability, it did exhibit long-run price stability from 1821-1914.(3) For a number of key countries from the eighteenth century to the present, the gold standard episodes are virtually without inflation persistence compared to the post-World War II era when inflation is significant and positive.(4) Inflation persistence was lower in the fully convertible Bretton Woods period (1959-71) than in the preconvertible period and the subsequent floating exchange rate period.(5) This illustrates the importance of the stable nominal anchor provided by the gold standard and its Bretton Woods variant.(6) As is argued in the next section, the gold standard also may have provided a credible commitment mechanism.

Finally, although the Bretton Woods system in its convertible phase was the most...