Scott Sumner: evaluation

Transcript context

…How well countries did it is a different matter, but some countries did it well. One way of answering that question is to think about, why didn’t countries move sooner? I think one of the problems is that previous experiences with fiat currency tended to be highly negative. Highly inflationary episodes, most notably the period right after World War I, where a number of European countries, especially Germany, suffered hyperinflation. At that time, fiat currency was associated with hyperinflation, highly irresponsible monetary policies. Even John Maynard Keynes had very negative things to say about pure fiat currency regimes. He’s today viewed as an opponent of the gold standard, but he didn’t really favor fiat currency. He favored something more like a Bretton Woods system with some sort of gold peg that could be adjusted in an emergency. Because of those negative experiences, it took a tremendous amount of pain before countries were willing to abandon gold and switch over to fiat money. A modern analogy to that might be the situation in Argentina at the end of the 1990s and early 2000s. Argentina went through four very painful years of deflation with the currency board regime. If you wonder, “Well, why didn’t they abandon that sooner, devalue, try to get the economy out of depression?” Argentina had previously had decades of painful history with high inflation. The public was strongly opposed to inflationary fiat money regimes, and they were willing to tough out the currency board for longer than most other modern political systems would have stuck with it. I think you have to look at the painful experience with fiat currency in the recent past. Remember, the post–World War I hyperinflation in Europe was a recent event for them. I think that colored the views of policymakers in the early 1930s, made them reluctant to move away from fiat until the pain was so intense that politics forced them off of gold standard to fiat money. Yes. What’s the key missing analytical variable? At some point, fiat money becomes quite workable. Is it ease of monitoring the Fed, or is it climate of ideas in society? What is it that was different from what the economists worried about?…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.