The credibility of the gold standard

There is a new published paper from Niall Ferguson and Moritz Schularick:

We ask whether developing countries reap credibility gains from submitting policy to a strict monetary rule. We look at the gold standard era, 1880-1914, to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility, focusing on sixty independent and colonial borrowers in the London market. We challenge the traditional view that gold standard adherence was a credible commitment mechanism rewarded by financial markets with lower borrowing costs. We demonstrate that for the poor periphery – where policy credibility is a particularly acute problem – the market looked behind “the thin film of gold”.

Here is the published version, and here, here is an earlier version, all with varying degrees of gatedness.

For the pointer I thank Rob Raffety.


The minute I saw Niall Ferguson's name, I new what the conclusion would be.

A gentleman's science.

Ah, Niall Ferguson -

'In May 2009, Ferguson became involved in a high-profile exchange of views with economist Paul Krugman (winner in 2008 of the Nobel Memorial Prize in Economics) arising out of a panel discussion hosted by Pen/New York Review on 30 April 2009, regarding the U.S. economy. Ferguson contended that the Obama administration's policies are simultaneously Keynesian and monetarist, in an incoherent mix, and specifically that the government's issuance of a multitude of new bonds will cause an increase in interest rates. Krugman then extended the same criticism to China and the European Union, as both pursued policies more in accord with Ferguson's stance than Krugman's.[55][56][57][58]

Krugman argued that Ferguson's view is "resurrecting 75-year old fallacies" and full of "basic errors". He also stated that Ferguson is a "poseur" who "hasn't bothered to understand the basics, relying on snide comments and surface cleverness to convey the impression of wisdom. It's all style, no comprehension of substance."[59][60][61][62]

In 2012, Jonathan Portes, the Director of the National Institute of Economic and Social Research, said that subsequent events had shown Ferguson to be wrong: "As we all know, since then both the US and UK have had deficits running at historically extremely high levels, and long-term interest rates at historic lows: as Krugman has repeatedly pointed out, the (IS-LM) textbook has been spot on."[63]

Later in 2012, after Ferguson wrote a cover story for the magazine Newsweek arguing that Mitt Romney should be elected in the upcoming US presidential election, Krugman wrote that there were multiple errors and misrepresentations in the story, concluding that "We’re not talking about ideology or even economic analysis here — just a plain misrepresentation of the facts, with an august publication letting itself be used to misinform readers. The Times would require an abject correction if something like that slipped through. Will Newsweek?"[64] Ferguson denied that he had misrepresented the facts in an online rebuttal.[65] Matthew O'Brien countered that Ferguson was still distorting the meaning of the CBO report being discussed, and that the entire piece could be read as an effort to deceive.[66]'

And for anybody interested in watching Ferguson and his ideology being ripped to shreds, this link is a feast - Especially considering his laughable response, as summarized from Wikipedia - 'Ferguson demanded an apology and threatened to sue Mishra on charges of libel.'

Ferguson was lucky to find a critic so bad that he came out looking the better. Omar at Brown Pundits has a "rolling review" of Mishra's book here:
Ferguson's sole "killer app" is not being Pankaj Mishra. On the other hand, it's easy to understand Mishra not reading Ferguson's book before reviewing it, you couldn't pay me to do so.

The inflation is coming. It's amazing how many hobbyhorses I have ;)

Sadly, your link is not to something that proves Mishra didn't read the book, but just discussion of why such a biting review is not to some commenters' tastes.

Here is a sample of the review -

'As in Ferguson’s other books, a vast bibliography trails the main text of Civilisation, signalling the diligent scholar rather than the populist simplifier. But he suppresses or ignores facts that complicate his picture of the West’s sui generis efflorescence. Arguing that the Scientific Revolution was ‘wholly Eurocentric’, he disregards contemporary scholarship about Muslim contributions to Western science, most recently summarised in George Saliba’s Islam and the Making of the European Renaissance. He prefers the hoary prejudice that Muslim clerics began to shut down rational thought in their societies at the end of the 11th century. He brusquely dismisses Kenneth Pomeranz’s path-breaking book The Great Divergence, asserting that ‘recent research has demolished the fashionable view that China was economically neck to neck with the West until as recently as 1800.’ But he offers no evidence of this fashion-defying research. Given his focus on the ineptitude and collapse of the Ming dynasty, you might think that their successors, the Qing, had for nearly two centuries desperately clung on in a country in irreversible decline rather than, as is the case, presided over a massive expansion of Chinese territory and commercial interests. Each of Ferguson’s comparisons and analogies between the West and the Rest, reminiscent of college debating clubs, provokes a counter-question. The rational Frederick the Great is compared to the orientally despotic and indolent Ottoman Sultan Osman III. Why not, you wonder, to the energetic Tipu Sultan, another Muslim contemporary, who was as keen on military innovation as on foreign trade?'

To which Ferguson replies -
'Not content with libelling me, Mishra also systematically misrepresents my new book, falsely alleging a whole series of omissions. He claims that in Civilisation I disregard ‘Muslim contributions to Western science’; in fact, I discuss them in some detail. He asserts that I ‘offer no evidence’ for my claim that China was very far from being economically neck to neck with the West in 1800. In fact, the point is footnoted and the work of two Chinese scholars, Guan Hanhui and Li Daokui, clearly referenced; I also provide Angus Maddison’s figures for per capita income. Mishra alleges that ‘Asian leaders and intellectuals’ are ‘mute here as in all Ferguson’s books’ and that I do not discuss their growing awareness of Western predominance. In fact, I devote three pages each to the Ottoman and Japanese responses to Western ascendancy. Gandhi is quoted at length. He is no more ‘mute’ here than in Empire or War of the World. Mishra says I don’t mention the genocidal policies pursued by the Belgian rulers of the Congo: in fact, they are referred to twice. He claims that I do not discuss how Western innovations, when ‘imposed on societies historically unprepared for them, could turn literally into killers’. Yet my discussions of the use of modern artillery in Chapter 2, and railways and ‘eugenics’ in Chapter 4, do precisely that.'

And here is Mishra's response -
'Faulted for insisting that the Scientific Revolution was ‘wholly Eurocentric’, he points to his discussion of the Muslim contribution to science in the first centuries of Islam. Charged with uncouthly dismissing Kenneth Pomeranz’s classic study The Great Divergence, he now unearths a footnote which actually refers to an unpublished paper by two obscure Chinese scholars. He also misrepresents my argument about the devastation caused by his beloved ‘killer’ apps in non-Western societies; I referred specifically to apparently benevolent ‘apps’ like property rights rather than actual ‘killers’ like artillery.

Needless to say, Ferguson’s few (and mostly pejorative) references to Gandhi don’t compensate for his suppression of Asian and African voices in his books. More revealingly, he thinks that two vaguely worded sentences 15 pages apart in a long paean to the superiority of Western civilisation are sufficient reckoning with the extermination of ten million people in the Congo. I am guilty, however, of failing to find the ‘surely unmissable’ irony in Ferguson’s cheerleading of ‘neoimperialist’ wars.''

The back and forth continues, but this next to last point in Mishra's final response concerning an example of Ferguson's sourcing demonstrates how seriously Ferguson is to be treated in the present as a scholar - 'Asked for proof of the ‘recent research’ that has ‘demolished’ Kenneth Pomeranz’s The Great Divergence, he comes up with the curriculum vitae of a Chinese academic nearly as well connected as he is. However, some readers of Civilisation may still want to see the actual paper that apparently singlehandedly discredits a major work of scholarship.'

Ferguson ended up looking like an idiot after the exchange (especially the whining about being libelled), in pretty much everyone's mind, except for the sort of deep thinkers who were predicting a Romney landslide on Nov. 5.

And here is Ferguson's own recent words, where he says the economy is not the most important factor in the presidential race, concerning how he viewed the recent election -

'Explanation four: The economy isn’t the No. 1 issue, despite what people say. The more I watch of this election, the more I incline toward this last explanation.


Or maybe, just maybe, this election is boiling down to a contest between white non-Hispanic men and everyone else. After all the high hopes of 2008, it will be depressing if that is the outcome of the Obama presidency: an electorate split along the dividing lines of race and sex.'

Only an idiot, or something equivalent, would think that a popular victory for Obama represents a split among dividing lines of race (white males are simply one minority with multiple interests among a broad group of voters - the majority of those voters has gotten sick of pandering to one subgroup's incessant whining, though with their loss, that subgroup's whining has only grown louder and more childlike) and sex (as if concern about bodily automony, for example, only become a female issue when it involves abortion, rape, or contraception) - plenty of white non-Hispanic men voted for Obama, especially in Ohio, due to economic reasons, having nothing to do with dividing lines of race or sex.

'In Ohio, one of the states that helped to deliver Obama his second term, the president was able to keep his deficit among white men to 10 percentage points, and was even with Romney among white males with incomes of $75,000 or less.

At the heart of that achievement was Obama's support for the federal government's $85 billion bailout of the automobile industry. His decision saved more than 1 million jobs, many held by white men in Ohio and throughout the upper Midwest.'

Some more from that link - 'In Toledo, Ohio, home to automobile factories for more than a century, white male voters said that they believed Obama was the stronger candidate on the economy.

"I voted for Obama because he saved my job," David Swogger, 38, who works security at the Jeep plant in Toledo, said at a polling station not far from downtown Toledo.

Like the rest of the population, white men said overwhelmingly that the economy was their first priority, Reuters/Ipsos polling showed.

"The economy is what matters most to me and we need to keep Obama to fix it," said Kai Sprinkle, 39, a truck driver who voted in Toledo.'

It was the economy, stupid, that won Obama Ohio, and the Electoral College. But Ferguson seems incapable of viewing the world in any other way than that of his extremely tired Weltanschauung.

I said Mishra didn't read the book because he claims Ferguson doesn't write about things like the Bengali famine or Belgian Congo when he actually did. In Fergusons reply letter search for "systematically misrepresents" (Niall counts "five supposed omissions"). In Mishra's reply he acknowledges that Ferguson actually did write about those things he had claimed he didn't write about, but then says they weren't "sufficient", which is quite a different claim from that made in the original review. I should acknowledge that I was semi-sarcastic about Pankaj understandably not reading the book. The alternative to simple ignorance of the contents is, as Ferguson noted in a reply, he was "wilfully and maliciously misrepresenting it".

You can make a number of arguments to the effect that Ferguson is an idiot, and you will not receive any disagreement from me. He doesn't know economics and was hopelessly outclassed against Krugman, nor are the readers of the Daily Beast going to receive much enlightenment from him about American politics. My point was that Mishra had the broad-side of a barn in front of him and still missed widely in his original review, with a rather pathetic attempt to explain away his original dishonesty. Take for example Ferguson's dismissal of Pomeranz. Niall cites an unpublished paper by two Chinese scholars. The obvious criticism would be that "The Great Divergence" is widely cited, how can we be confident that unpublished paper has "demolished" the thesis in the eyes of any other experts on the topic? Instead Pankaj writes he offers "no evidence" as if it were an unsupported claim. When Ferguson replies that he actually gave a citation, Mishra hilariously writes he that "unearths" a footnote. As Niall says, it was there the whole time but Mishra ignored it until it was pointed out. Then, in a display of Harry Frankfurt, he calls them "obscure" and then complains that Niall is citing a c.v & google results to show that at least one of them is hardly obscure. When a fool sticks his neck out that like that, he is simply asking to get socked in such a manner.

I think British libel laws are abominable and have contempt for Ferguson attempting to subject Mishra to them. But as a white english man married to a black somalian woman and with a mixed-race child, it's not at all surprising he would take allegations of racism personally. Although maybe Pankaj was ignorant of that as well.

Point of info: wanting to keep your own money is not whining.

Wanting to take from others is whining.

Elsewise, isn't that a lot of words to basically say that a fiat money credit system is flexible and maybe the Fed is keeping rates low?

Complaining that the majority of Americans are lazy moochers because they don't want to dismantle the New Deal/Great Society state is whining.

"Point of info: wanting to keep your own money is not whining."

Taking the benefits of something and then complaining about the costs is whining when you're the only one doing it. It's not really "your own money" if you live under a compact where part of that money is pledged elsewhere.

Wrong and wrong guys.

As I've said at least twice, and have to keep saying, the government and Democrats spend half a century misleading voters that it was their money and that there was a trust fund and then a lock box.

Now they make fun of people for believing they can get the money out that they put in.

Democrats have been effective politically.

The government, Obama, Democrats and math are going to dismantle the entitlements.

The democrats job is to make the Republicans look like the devil. They've been better at this so I suspect they will succeed.

But your welfare state is still going away.

Am I the only one amused by the fact that Mishra simultaneously accuses Ferguson of marginalizing Asian voices while also accusing him of ignoring the work of a Famous White Male (Pomeranz' The Great Divergence) in favor of a work by two "lesser" Asian scholars?

Mishra is the sort of buffoon that only a Naipaul could write about, but you have to admire his utter lack of self awareness.

Niall Ferguson is a very fine historian. Conservative yes. But a necessary corrective to all the "politically correct" nonsense we see around us.

Prior approval : I hail from Tipu Sultan's hometown. It's absolutely a sacrilege to compare this Muslim despot with Frederick the Great.
And whether you like it or not, the "Scientific Revolution" was more or less wholly "Eurocentric" or more specifically concentrated in North West Europe (the stretch of land mass from Glasgow to Nice).

As a historian, Ferguson faithfully presents the past (without adding spin to it in order to pander to the insecurities of audiences in the Third World).

Prior approval:
1. Wanting to "tax the rich a little bit more" is whining.
Campaigning for "lower taxes" and "lower spending" is not.
2. Wanting to abort "foetuses" to escape from responsibilities arising from actions is whining.
3. Wanting "marriage status" for homosexual relationships which have none of the asymmetries that characterize man-woman relationships is whining.

It is Obama's core vote banks that do all the whining. Not the conservatives - who are essentially pleading for a less paternalistic govt and a sturdy faith in free markets and traditional values.

'Taxes = theft' is whining
'The mainstream media oppresses us' is whining
'Black people get all the goodies' is whining
'Christmas isn't properly valorized' is whining


Obama saved their jobs?

Take a look at the labor force in Ohio over the past several years. The unemployment rate dipped in the third quarter only because a lot of people dropped out of the labor force. Third quarter employment for the state was down.

People should have learned from the rise of Jap cars in the US that protecting the Big Three for decades only protected them from having to innovate and cut costs. At what price did he save jobs?

Those idiots will be on the unemployment lines soon enough, with their jobs moving abroad or to non-union states.

Ford didn't take a bail out so it is not a problem with all of the Big Three.

But more to the point, Obama did not save the auto industry. He saved the auto Union. Without the bail out they would have had their benefits renegotiated and the workers would have lost their plush health care packages.

And while you are right that it will not help in the long run - any more than bogus charges against Toyota for non-existent safety issues will - it may have done enough to get him over the line in the election. And that's what counts.

Agreed. But Ford was part of the problem going into the 1970s. Of the former Big Three, Ford probably innovated the most because it had a successful worldwide production program. Their F-150, I believe, has been the top selling auto in the US for quite some time and their smaller cars sold well overseas.

I do believe that Toyota had a problem with its fly-by-wire throttle positioning sensor. I just don't believe that people were unable to control their runaway cars. You can shift into neutral, turn off the engine, or simply slam on the brakes. All of those things will safely stop you. Brakes are much more powerful than the engine.

I think a lot of people just used it as an excuse for hitting people from behind. When I drove a friend's Prius, I found that the stopping distance was greater than I expected. My gut feeling is that the regenerative brakes, which derive energy from stopping, reduce some of the energy that would have gone into braking.

I think they fixed this by shutting down the throttle when the brakes are applied. The computer on modern cars is controlled through the accelerator pedal, so it would not surprise me that engine problems originate there.

I knew that this would turn into a discussion of the credibility of Nial Furgeson.

The very definition of "ad hominem."

The funny thing is that if not for Germany and US, the direction of his argument would be correct, right? And are Germany and the US simply benefiting from the flight-to-quality regime? And that's where people like Peter Schiff got it wrong too, they get right that America isn't being America, but they gave short shrift to how less like America non-Americas are as well. But what happens when Asia stops lending and The Fed has to repair its balance sheet? I have no idea what I'm talking about, but the point is we still don't know if they just got the timing wrong- not that they actually claimed a timing call. Maybe it's just red herrings and strawmen. I don't know who thought The Fed couldn't prop up zombie banks, for example. Bernanke didn't think that. China has papered over our fiscal problems. The Fed can paper over the bank problems. The ability to paper over problems in the short term is exactly what we believe in.

Weren't we talking about the gold standard by the way? So, since PK criticized Ferguson does that mean we should support the gold standard? Not that an emerging market is directly applicable to anything else.

Economists are funny. They deal with things that are squishier and more feedbacky than even biology and yet they want obvious black-and-white results.

An attack on someone's credibility is hardly the "very definition" of an ad hominem. And, in fact, it's an entirely legitimate line of attack to take against the soundness, rather than the validity, of an argument.

We demonstrate that for the poor periphery – where policy credibility is a particularly acute problem – the market looked behind “the thin film of gold”.

Not a particularly astonishing result, though careful empirical support for common sense is always nice.

I'd be interested to know what you consider the a priori common sense position.

the rest of the abstract states:
"Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors."

Isn't gold a bit like the borrowing in another country's currency? On the one hand, you can't inflate. On the other hand, you can't inflate. That is, you balance return on your money with return of your money. And their point doesn't seem that over-reaching when they state that a veneer of gold does not give investors false confidence.

The a priori common sense position is that countries on the gold standard can go off the gold standard when it suits them. There is no divine force making them stay on it.

Hence, if you have reservations about a particular government, there is no particular reason to think that its commitment to gold is unalterable. In fact, even if you have no such reservations, there is no reason to think that.

Gold bugs seem somehow to imagine that going to a gold standard is something other than a political decision, easily (and sensibly) abandoned when necessary. They are wrong.

Re the (non)-credibility of the gold standard among developing countries: this is why the gold standard does not work when things go bad: as for example during the Great Depression when there was a "race to the bottom" to devalue the gold standard. The market figured that since central banks controlled fiat currency, no paper currency was safe--even if backed by gold. Hence the gold outflows to the 'safest' country, which the market deemed to be the USA. Solution? E-Money not controlled by anybody, or, a constitutionally mandated gold standard (harder to overturn, since it requires a special election or supermajority of people), or, gold coins (yes coins). Probably e-money is the best solution. A gold standard 'controlled' by everybody (e-money) is 'controlled' by nobody. When will economists wake up to this fact? Peter Schiff makes more and more sense as time goes by, not to mention George Selgin. Stickiness of prices is the only thing Keynesians have going for them. As corporations downsize and economies of scale decrease (see this weeks Economist on this topic) this Keynesian citadel will fall IMO.

So, Bitcoin?

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