Policy Documentation Center

Research Center of the Slovak Foreign Policy Association

Finding Common Grounds. Rediscovering the common narrative of Turkey and Europe

Sonin, Konstantin

  
 
Against the Gold Standard 
A lot of simplistic ideas for solving complex problems become popular during economic crises.
One such proposal is for Russia to adopt the gold standard -- that is, to print only as much
money as the Central Bank holds in its gold reserves. Such talk is fraught with serious risks.
Recall the 1930s, when countries that tied their currencies to gold quickly yielded to the ruinous
temptation of protectionism. Nonetheless, the same idea has now grabbed the attention not only
of the Russian media, but of top government advisers as well. 
There are two basic economic arguments against the gold standard. The first holds that
monetary policy is too important a tool for smoothing fluctuations in the aggregate demand.
Easing monetary policy cannot affect "real" economic variables, such as the level of industrial
output and unemployment in the long term. But it can have an impact in the short term as long
as firms and individuals that have not yet adapted their expectations to the reality of rising
prices. If monetary authorities are certain that they can stop printing money after a while, such a
move can indeed help in a recession. But adhering to a gold standard does not allow for
conducting countercyclical monetary policies. The overall volume of currency is determined by
the amount of gold held by the Central Bank, and the ruble-to-gold exchange rate is
permanently fixed at the moment when the gold standard is first adopted. At the same time, the
inflexibility of the gold standard -- that is, the inability to arbitrarily print money and thereby
conduct an active monetary policy -- is also its greatest advantage. As long ago as the 1960s,
U.S. economists (and future Nobel laureates) Milton Friedman and Edmund Phelps argued in
their works that when an economic entity is expecting high inflation, monetary policy loses
almost all of its meaning since issuing more money only leads to higher prices. The gold
standard might help in putting a halt to inflation by not allowing the monetary base to grow.
 
In one sense, the second argument against implementing the gold standard is only a
continuation of the first. But it also took the work of a number of outstanding minds, including
economists Finn Kydland and Edward Prescott (also Nobel prize winners) and their followers in
modern political economy and macroeconomics, regarding stagflation of the 1970s to enunciate
the argument clearly. The usefulness of the gold standard is limited by the fact that no
government in the world can make a commitment not to abandon it in the future. This is
especially true because it often requires not only a firm commitment from a politician or political
party, but also from a future government. But if this were possible in principle, a commitment to
many other forms of monetary policy would work as well. 
 
Of course, the gold standard does have its charm. The classic article "The Gold Standard and
the Great Depression" by Barry Eichengreen and Peter Temin describes how difficult it was for
state leaders prior to the Great Depression to reject the "gold mentality" -- even when it became
obvious that the gold standard itself was creating problems. Nonetheless, the question of
monetary policy is really an issue of the people's faith in the government, and there is no
magical elixir that can help create this. 
 
 
Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for
Vedomosti.  
 
23 April 2009 
 
 
© Copyright 2007. The Moscow Times. All rights reserved.  
 


English

Against the gold standard

  
 
Learning Modernization from Gref 
04 June 2009 
By Konstantin Sonin 
There are several reasons for the relative calm regarding Russia's economy. First, the crisis looks worse 
on the pages of newspapers and analytical reports than on the streets of Moscow, where it doesn't 
appear that we are in the middle of a deep crisis.  
Despite official figures showing that unemployment reached 10.2 percent in late April, there have been 
no mass demonstrations outside the Moscow Ring Road like there were during the turbulent 1990s. 
 
Second, the economic downturn has finally slowed its pace. 
Third, most of the signals coming from world markets are positive. If the Chinese government is not 
manipulating its economic data -- which is always a distinct possibility in countries without a free press --
then even the sharp drop in exports has not stopped the Chinese economy from growing at considerable 
speed. Meanwhile, the price of oil, which is considered an indicator of investor confidence, refuses to 
climb back to levels of seven or eight years ago, a time when it was widely believed that the global 
market economy had learned to function without a cyclical rise and fall. 
But there are still many reasons to be pessimistic. First, many governments of the world have transferred 
the burden from future generations onto the present one by piling on huge debt, making the task of 
balancing their budgets extremely difficult for years to come. 
Second, gross domestic product has fallen at record speeds in many countries. This played a mean joke 
on governments. If in the past they refused to increase the money supply for fear of spurring inflation, 
now this is longer off limits since prices across the board have fallen along with the economy. But it is 
anybody's guess as to how those governments will eventually close their budget deficits. 
Russia's prospects look bleak on their own without taking into consideration the broader problems in the 
global economy. How will the Russian economy turn the tide by showing positive GDP growth? If the 
price of oil does not rise above current levels, Russia will earn enough petrodollars to cover its budgetary 
needs but not enough to address the problem of long-term development. 
Cheap liquidity is not the solution because the price of borrowing money will only increase in the near 
future. As soon as the global economy picks up again, most developed economies will have to tighten 
monetary policy. The energy with which bankrupt Russian firms resist creditors' efforts to repossess their 
property makes it clear that credit will be hard to secure for years to come because political favoritism 
has kept so many "zombie firms" artificially alive. 
Given these circumstances, it is not clear when we will ever see positive growth again. Now is the time to 
think seriously about modernizing Russia's economy. Perhaps President Dmitry Medvedev should dust 
off the strategic modernization program that German Gref developed in 1999, when he was head of the 
Center for Strategic Development think tank, and read it cover to cover. He might learn something new. 
 
 
Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.
 


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