BoE Finds Gold Standard Leads To Less Crises Than Fiat Regime

Tyler Durden's picture


There should be three objectives for a well-functioning monetary system: i) internal balance, ii) allocative efficiency and iii) financial stability. The international financial and monetary system (IFMS) has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, this recent Bank of England paper finds that today’s 'fiat' system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System, with the key failure being the system’s inability to maintain financial stability and minimize the incidence of disruptive sudden changes in global capital flows. There is little consensus in the academic literature, or among policymakers, on what are the underlying problems in the global economy which allow excessive imbalances to build in today’s IMFS and/or which impede the IMFS from adjusting smoothly to counteract these imbalances. Critically though, while the fiat money system we are currently does indeed exhibit lower GDP growth volatility (by design), it has dramatically more incidents of banking and currency crises than under a Gold Standard.


The IMFS is the set of arrangements and institutions that facilitate international trade and the allocation of investment capital across nations. A well-functioning system should promote economic growth by channeling resources in an efficient manner across countries, over time, and in different states of the world. It should do this by creating the right conditions for international financial markets to operate in a smooth and sustainable fashion, discouraging the build-up of balance of payments problems, and facilitating access to finance in the face of disruptive shocks. These functions suggest that the ideal system should satisfy the following objectives:

  • Internal balance — the IMFS should enable countries to use macroeconomic policies to achieve non-inflationary growth.
  • Allocative efficiency — the IMFS should facilitate the efficient allocation of capital by allowing flows to respond to relative price signals.
  • Financial stability — the IMFS should help to minimize the risks to financial stability.

While there are some complementarities between these objectives, there may also be conflicts.


The various IMFS regimes have involved different combinations of international and national frameworks. Members of the Gold Standard, for example, fixed their currencies to gold, allowed capital to flow freely across borders and tended not to use monetary policy actively. So they gave up on the internal balance objective to achieve allocative efficiency and financial stability. The Bretton Woods System (BWS) featured fixed but adjustable nominal exchange rates, constrained monetary policy independence and capital controls — effectively sacrificing the allocative efficiency objective to allow greater control over internal balance and financial stability.

In contrast, in today’s system there are almost no binding international rules; rather there exists a hybrid arrangement in which countries are free to choose whether to fix or float their exchange rate and whether to impose capital controls or not. While today’s IMFS affords countries the freedom to pursue policies to suit their domestic objectives, this flexibility has also created problems.



World GDP Growth

Similar average growth, less volatile under 'Fiat' via Keynesianism, much higher Inflation, much higher inflation volatilty...


World Crisis Incidence

dramatically lower incident of crises under Gold Standard; Double the average number of external defaults per year under current 'fiat' system


This paper attempts to provide a framework for thinking about these underlying problems, and thus a means for discriminating among the reform solutions.


In our words, it would appear that the current 'fiat' money system is akin to a prozac-loaded psychopath - all the time the prozac is there anger is dampened (but remains under the surface). If something happens to the pharmacist - some external shock that shuts them down - then the psychopath comes out bigger after his long suppression...

'Fiat' suppresses reality but the cumulative reality will always find a way to escape - in crisis


Full paper here:

Fs Paper13

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Wed, 10/10/2012 - 09:46 | 2874587 GetZeeGold
GetZeeGold's picture



The barbarians are on line 2 Chuck.


Wed, 10/10/2012 - 10:03 | 2874622 ParkAveFlasher
ParkAveFlasher's picture

How about gold and silver spot trading as if they weren't joined at the hip this morn!

Wed, 10/10/2012 - 10:06 | 2874628 3rdgrader
3rdgrader's picture

Rope em, tar & feather em, strap em to a wagon wheel and set fire to em

Wed, 10/10/2012 - 10:27 | 2874672 Dalago
Dalago's picture

Probably in the short term but in the long run a standard is needed.  It will happen.  Not having a standard is like have no bases of measurement.  No, not like it IS.  No one controls how long a inch is or how far a mile is or how tall a foot is.  So why the fuck is some cock sucker controlling how much is the price of a dollar?  An inch is an inch and everything is measure from it.  A basket of commodities and precious metals and throw in blow and prostitution for good measure and you have the God damn standard.

Wed, 10/10/2012 - 10:49 | 2874757 kridkrid
kridkrid's picture

Why do we need a standard at all?  Do we have a standard for the price of milk, or for oil, or for anything?  The problem is not the lack of a standard, the problem is corrupt centralized control.  The BOE weighing in on this confirms what I have suspected for some time.  The talk of a standard will be the distraction used to keep control of money in the hands of the bankers.  It isn't the bankers fault... it's the concept of fiat money... so swing the pendulum to the gold standard, but keep control in the hands of those who have control now.  Wrong answer.  Stop the monopolistic control of money.

Wed, 10/10/2012 - 11:11 | 2874864 Poor Grogman
Poor Grogman's picture

"Competing currencies" is the same as no standard at all.

Ron Paul had it nailed with this single solution.

This is what will have to be implemented to break the grip over money..

Wed, 10/10/2012 - 18:26 | 2876353 tooktheredpill
tooktheredpill's picture

i wonder if they looked at regulation V crisis freq

Wed, 10/10/2012 - 15:12 | 2875808 twh99
twh99's picture

Wrong.  You measure milk against the money you spend to purchase it.  Everything you consume in life is measured against money.  But what is money measured against?


Ultimately it would be better to have something stable, like gold, be used as the measure of money.

Wed, 10/10/2012 - 16:04 | 2875975 SilverRhino
SilverRhino's picture

We have standards in everything from physics to chemistry to engineering.   Creating a non-changeable benchmark for money prevents governments / central banks from creating currency out of thin air like they are doing now.  

Essentially we need a CONSTANT for money just like we need constants for science.   If not we get the chaos we keep seeing in history.  

And yes a gold standard is deflationary if technology continues to advance faster than the supply of gold.  

Wed, 10/10/2012 - 10:51 | 2874760 malikai
malikai's picture

I think this report is fantastic. I want to see the follow on report that documents the incredibly smart move by Mr. Brown in helping to foster the 'bottom'.

Wed, 10/10/2012 - 10:31 | 2874702 kito
kito's picture

gold and silver are getting nervous that mittens may win. a romney win will shoot the markets upwards, and hammer the metals, during romneys honeymoon......even the inevitable u.s. downgrade will likely be put off six months to allow romney some breathing room........the sheeple will believe that romney is the savior...that he will draw the fiscal line in the sand.....that HE will fire bernanke, balance the budget, reduce the debt, raise interest rates..crush china........heal the infirm...walk on water....invoke the spirit of reagan..........give us liberty!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!........

Wed, 10/10/2012 - 10:39 | 2874730 GetZeeGold
GetZeeGold's picture



Just when socialism seemed to be working out so well.


Wed, 10/10/2012 - 10:49 | 2874756 kito
kito's picture

no worries...............corporatocracy and bank socialism will live on under romney......................


obamney 2012

Wed, 10/10/2012 - 10:52 | 2874767 malikai
malikai's picture

Who invented Obamacare(Pelosicare)?


Wed, 10/10/2012 - 11:42 | 2874999 kito
kito's picture

Keep grazin partisan playing the part of the partisan puppet so well.....mehhhhhhh.....

Wed, 10/10/2012 - 12:37 | 2875211 malikai
malikai's picture

Partisan? LOL.

Nah man come on, you should know by now that I'm not a member of the two colored/headed animal's party..

Wasn't it Romneycare that Obamacare is based on?

Fucking futile to think that this asshole is going to change anything. If he does, 100% guarantee it will be even worse. Which, I accept is difficult to contemplate how that can be done, but the new batch of puppets can be counted on to find a way.

Wed, 10/10/2012 - 10:43 | 2874741 ParkAveFlasher
ParkAveFlasher's picture

I don't know that Mittens can't print, tax, or loot just to keep the heat on in the White House.

Wed, 10/10/2012 - 10:51 | 2874761 kito
kito's picture

never would he do that................mittens is the small government pro-liberty savior.......really............he said so.........i believe him..........

Wed, 10/10/2012 - 10:59 | 2874789 kridkrid
kridkrid's picture

Small government will only hasten the collapse.  I'll get a lot of down-votes for saying this... because people want desperately to believe that there is a solution to this mess, but there is not... only timing.  You can either figure out ways to continue to feed the exponential function or you can watch it collapse.  And you can't feed the function forever... so collapse it will.  So the charade of reducing the deficit is just that.  A charade.  Obama said the same thing, but alas he jumped right on the exponential function, just like the presidents before him.  Some presidents benefitedby the consumer and corporations doing their part... but people are mostly tapped out.  The end is growing near... what we do after the end is what we should be discussing.

Wed, 10/10/2012 - 11:44 | 2875013 kito
kito's picture

You are right...but the longer big government holds on, the worse it will be.....

Wed, 10/10/2012 - 11:02 | 2874807 ParkAveFlasher
ParkAveFlasher's picture

Don't you mean Ron Paul?  I mean, uh Paul Ryan ... no no he's that crazy uncle guy ... no wait - what did I read in USA Today .. ummm -

I suppose you're right then!

Wed, 10/10/2012 - 11:44 | 2875012 Nage42
Nage42's picture

Can I paraphrase your paragraph?

"He will provide those with some semblance of intelligence with another great buy opportunity to accumulate,"  does that about sum it up?




Wed, 10/10/2012 - 11:30 | 2874943 Clayton Bigsby
Clayton Bigsby's picture

Trial Balloon, Bitchez...

Wed, 10/10/2012 - 13:23 | 2875400 LongBalls
LongBalls's picture

Basel III eliminates Tier 3. Read between the lines. We are moving to a new monetary system.

Wed, 10/10/2012 - 09:45 | 2874588 SilverTree
SilverTree's picture

Thunderdome bitchez!

Wed, 10/10/2012 - 09:47 | 2874591 GetZeeGold
GetZeeGold's picture's a zero sum game.


Wed, 10/10/2012 - 09:57 | 2874611 Dr. No
Dr. No's picture

Not really:  "Two men enter, one man leaves"

Wed, 10/10/2012 - 10:01 | 2874614 GetZeeGold
GetZeeGold's picture



I don't think you seem to be grasping the concept. It's zero for the guy that doesn't leave.


Wed, 10/10/2012 - 10:02 | 2874619 ParkAveFlasher
ParkAveFlasher's picture

Bust the deal.  Face the wheel. - Auntie

Wed, 10/10/2012 - 10:17 | 2874665 blueRidgeBoy
blueRidgeBoy's picture

who cares about him?  he lost

Wed, 10/10/2012 - 09:49 | 2874593 LawsofPhysics
LawsofPhysics's picture

China better spend some of that fiat before it becomes worthless.  So, pegging your currency to something fucking real isn't so bad after all, who'd a thunk it?

Wed, 10/10/2012 - 11:09 | 2874851 Biosci
Biosci's picture

The elephant in the room, that is missing from the analysis (though I confess I haven't read the full report), is this simple fact:

All currency regimes fail.

Fixed or fiat, more or fewer crises, assign your value judgments as you see fit.  They are an emergent behavior of a complex adaptive system that is inherently unstable.  As always, it's the timing that's such a bitch.  Bitchez.

Wed, 10/10/2012 - 11:27 | 2874932 Broccoli
Broccoli's picture

What's your definition of fail? A 2,000 year old coin with good ole Julius Caesar stamped on the face will buy pretty much anything today. I am not aware of any gold coin that has ever become worthless in the entire history of the world?

I mean I guess when those treasures hunters find a gold ship that sunk on its journey from South American to Spain, the hunters just through the gold coins back in the water because damnit, it is not official legal tender certified by the Spanish government anymore.

The only valid complaint about PM regimes is that governments no longer have the "flexibility" to paper over unsustainable debt burdens, literally. I see that as a feature, not a bug.

Wed, 10/10/2012 - 11:39 | 2874988 Biosci
Biosci's picture

No, your 2,000 year old coin will not buy much of anything today, or most days in history, before converting it to the local currency.  Yes, gold is an outstanding store of value through these transitions.

Wed, 10/10/2012 - 09:51 | 2874596 Cognitive Dissonance
Cognitive Dissonance's picture

"There should be three objectives for a well-functioning monetary system: i) internal balance, ii) allocative efficiency and iii) financial stability."

With regard to a well-functioning monetary system the only thing that counts for those who wish to manipulate, lie, cheat and steal is the ability for them to manipulate, lie, cheat and steal.

He who makes the rules...............well, you know.

<I care not who creates the monetary system as long as I can manipulate it.>

Wed, 10/10/2012 - 09:55 | 2874607 disabledvet
disabledvet's picture

You still have to pay yourself first. Lying, cheating and stealing still doesn't get you there. (Miller's Crossing for all you home gamers.) Bretton Woods is still functioning...albeit in some type of "dollar standard" world. The reason to me is simple: you cannot "replace" the greenback. The best you can do is beat it at its own game. To date no one has tried...but clearly Germany is on to something.

Wed, 10/10/2012 - 10:05 | 2874625 Cognitive Dissonance
Cognitive Dissonance's picture

Bretton Woods is still functioning because it can still be manipulated.....and not just by the big guys. We all want our 'share' of the pie. We just don't discuss the process using ugly mafia terms, but rather respectable sounding names such as investing, trading, asset allocation etc.

Wed, 10/10/2012 - 10:15 | 2874651 Dr. Engali
Dr. Engali's picture

And that's the dirty little secret....we've become a nation of skimmers in a system that really produces very little value.

Wed, 10/10/2012 - 11:01 | 2874808 RockyRacoon
RockyRacoon's picture

Oxymoron of the day:  "Intelligence survey"

Wed, 10/10/2012 - 09:59 | 2874612 EscapeKey
EscapeKey's picture

He who has the gold... leases it out on a fractional reserve basis.

Wed, 10/10/2012 - 10:02 | 2874621 GetZeeGold
GetZeeGold's picture



Maybe the lender gets it back......maybe not.


Wed, 10/10/2012 - 09:53 | 2874603 No Euros please...
No Euros please we&#039;re British's picture

The biggest problem was using a reserve currency that was left in the charge of a bunch of crooked sociopaths.

Wed, 10/10/2012 - 10:05 | 2874627 ParkAveFlasher
ParkAveFlasher's picture

Fiat is sociopathic by requirement.  It requires a lie on the issuer's part, that lie is the very number written on the very note, which begins to diminish at the very moment it is written.

Wed, 10/10/2012 - 10:11 | 2874641 fuu
fuu's picture

You've been on a roll all week.

Wed, 10/10/2012 - 10:13 | 2874647 ParkAveFlasher
ParkAveFlasher's picture

I never took a finance, economics, or business course in my life.  This is my class, ZH.  Just trying to distill all this to the essence, so when I have to explain it to my kids, and all the textbooks are written to confuse, I won't be short on understanding.  


Wed, 10/10/2012 - 11:07 | 2874839 ParkAveFlasher
ParkAveFlasher's picture

combining form of Latin socius  a fellow, companion, comrade;


a combining form occurring in personal nouns corresponding to abstract nouns ending in -pathy,  with the general sense “one practicing such a treatment” ( osteopath ) or “one suffering from such an ailment” ( psychopath ).

Wed, 10/10/2012 - 09:54 | 2874605 PUD
PUD's picture

It's all moot in a debt as money system when the cost of debt carry meets peak debt. The singular problem is debt based money and the requirement it has for perpetual compounding exponential growth. It's all math and has nothing what so ever to do with policy. This is why there is no fix.

Wed, 10/10/2012 - 11:04 | 2874826 kridkrid
kridkrid's picture

I would like the cocksucker who downvoted your post to explain himself.  Come on fella... tell us how what he said is wrong.  I double dog dare you.

Wed, 10/10/2012 - 12:15 | 2875125 Freegold
Freegold's picture

So very true, no elite conspiracy here. It is only the easy money that most of us wants and especially politicians. No fix for this but a  new system will emerge. No goldstandard of the past bc it always fails sooner or later. In our interconnected electronic moneywolrd much sooner than before. You can never fix  papermoney to gold and make it last. It´s gold that is the constant not the other way around. Fixing the value of money will choke the economy and we don´t want that.

Gold is the best refrencepoint since at least 5000 years and we will find it´s true value soon. Get your gold while it´s still on sale :)

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