different timings

Preliminaries

Since our investigation is directed at uncovering differences in the relationships between money, inflation, and output under two monetary standards (commodity and fiat), we first carefully define what we mean by a monetary standard. Making this definition rigorous proves useful in classifying the periods we consider.

By a monetary standard, we mean the objects that serve as the unit of account and that back the objects that circulate as generally accepted means of payment (that is, the objects that back the objects that are money). Under a commodity standard, the unit of account is a fixed amount of the commodity. Government currency consists of coins made of the commodity and notes redeemable in the commodity; private monies, such as bank notes, are also redeemable in the commodity. Under a fiat standard, the unit of account is some abstract value, such as a dollar, pound, or peso. Government currency consists of irredeemable token coins and notes (fiat money), and private monies are redeemable in fiat money.

Identifying the monetary standard under which a country is operating is not always straightforward. The standard is unambiguous when people expect it to be permanent. Identification is less clear with temporary fiat standards, which are often the result of a need to finance a war. Bordo and Kydland (1993) argue that such standards are, in fact, commodity standards because people believe that there is a positive probability that the money will be convertible in the future. Bordo and Kydland argue that the gold standard should be thought of as a rule permitting such temporary suspensions. For this study, we adopt the Tiffany 1837 Lock bracelet-Kydland definition of the gold standard and consider those temporary fiat standards that are followed by a return to a commodity standard as being part of a commodity standard.

Assessing the relationships between money, inflation, and output under different monetary standards requires empirical counterparts to the concept of money. We use an eclectic approach. Following conventional studies of money and inflation, we use a broad measure of money (M2) that encompasses most objects that circulate as media of exchange or can quickly be converted into such objects. Because some theories of money suggest that broad measures of money may fail to reveal important relationships between money and inflation, we also employ narrower measures of money.1 These theories imply that money should be divided into two mutually exclusive categories: objects that represent a convertibility promise by, or claim on, the issuer and objects that represent no convertibility promise or claim. For convenience, we refer to the nonconvertible, unclaimable objects as primary money and the convertible, claimable objects as secondan money.2 Gold and silver coins (specie) that used to circulate in the United States and Federal Reserve notes that circulate today are examples of primary money: the issuers of this money do not promise to convert it into anything of value. Bank notes that used to circulate in the United States and bank deposits that circulate today are examples of secondary money: the issuers of this money promise to convert it into something else, usually on demand.

We measure the quantity of primary money by the total monetary assets that remain after the balance sheets of all agents in the economy (the nonbank public, the banks, the central bank, and the government) are consolidated. In netting out assets and liabilities, we consider objects that conventionally appear on the balance sheet of central banks and governments as liabilities only when they actually represent convertibility promises on the part of the issuer.3 Under a commodity standard, the quantity of primary money is the total specie held by all agents in the economy. Under a fiat standard, the quantity of primary money is the monetary base, the quantity of fiat money plus specie that is held by the bank and nonbank public.

To measure the quantity of secondary money. we add all the assets held by the nonbank public that are used as media of exchange and subtract the quantity of primary money. We take the assets that circulate as media of exchange to include those types included in the conventionally used monetary aggregate M2. Hence, our measure of secondary money is M2 less primary money.

We base our study on data for 15 countries that have operated under both commodity and fiat monetary standards. For each country, we computed the long-run geometric average growth rates of our three measures of money, prices, and output for the period during which the country operated under a commodity standard and the period during which it operated under a fiat standard. The countries in our sample and the periods during which they are considered to be operating under the two standards are given in the accompanying table. Because we were unable to obtain data on specie for Brazil and Sweden, those countries are not included in our sample for commodity money standards. Similarly, because we were unable to obtain data on the monetary base for Argentina, it is not included in our sample for fiat standards. However, we include two fiat periods for Spain: one prior to the Spanish Civil Tiffany 1837 Loop pendant and one from the beginning of World War II until 1980. This break occurs because the price and money series are not comparable between these two periods. We omit the hyperinflation period from the fiat period for Germany because money growth and inflation were so high during this period that if it were included, it would dominate all correlations for fiat standards. The data used are described in the appendix in Rolnick and Weber 1995.

                         

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The Sample

Timing for when countries went from being on a commodity standard to being on a fiat standard is based on the last time a country was officially on a commodity standard. However, for four countries in our sample, different timings for when they were on the two types of standards are plausible. Specifically, Argentina can be considered to have gone on a fiat standard in 1914 rather than in 1930 because its return to the gold standard in the late 1920s was shortlived. Brazil can be considered to have gone on a fiat standard in 1864 because, even though it was nominally on a gold standard until 1929, it experienced numerous suspensions of convertibility up to that time. Chile can be considered to have gone on a fiat standard in 1878 because it returned to a commodity standard after this date for only short periods Tiffany 1837 pendant 1895 to 1898 and from 1926 to 1931. Finally, Japan can be considered to have gone on a fiat standard in 1917 because its return to the gold standard in the early 1930s was short-lived. When we use these alternative timing assumptions, roughly half the countries in our sample have had commodity standard episodes end and fiat episodes begin at times other than the 1930s. We also performed all the calculations below using these alternative timing assumptions and found no substantive differences with the results reported below.