The Impotence of Central Banks Operating under the Classical Gold Standard’s Constraints

Indeed, many of the countries that were part of the classical gold standard did not even have central banks at the time. These included the United States, which was the largest participant, and Canada, Australia, and Switzerland, all of which were among those most successful in adhering to the standard. Central banks were, on the other hand, behind some of the least robust gold standards of Latin America and Asia.

When central banks did seek to exert some influence, they generally sought, not to expedite, but to forestall the gold standard’s normal operation, avoiding adjustments needed to preserve or restore international equilibrium. In particular, instead of managing their discount rates as if to mimic the response of decentralized arrangements, central banks attempted to take advantage of the ability their monopoly privileges gave them to defy the gold standard “rules” by sterilizing gold transfers. But while such attempts might succeed for a time in deferring needed adjustments, more often they proved entirely futile. Under the classical gold standard, Trevor Dick and John Floyd (1992) conclude, “central banks face[d] constraints, not rules,” and could not sterilize the effects of gold flows or control their domestic money stocks even if they wanted to.

For some, of course, the impotence of central banks operating under the classical gold standard’s constraints is a reason for condemning that arrangement as a barbarous relic. For others, though, it was a key to the classical gold standard’s success in stabilizing both money’s long-run purchasing power and international exchange rates—a success that, as we shall see, twice inspired government attempts to replicate the former system’s success.

--George Selgin, Money: Free and Unfree (Washington, DC: Cato Institute, 2017), e-book.