Limiting What Central Banks Do – Room for Debate – NYTimes.com
Professor Russell Roberts responds to the comments made by Robert Zoellick regarding his suggestion that there be some kind of return to a gold standard. Zoellick’s remarks are understandable in the current economic climate, especially when there is a probable trade war looming (thanks for nothing Barry).
The points raised by Professor Roberts are:
- how should central banks be constrained.
- the Gold Standard itself is a flawed system that imposed burdens upon the world’s economies during the Great Depression; this in turn either caused or exacerbated the downturn.
- the current system is just as flawed as the Gold Standard.
What is the best system? A return to the Gold Standard would be a very backward step, and I believe it is one that should be avoided. However, a system that seems to be unconstrained is as bad as the system of constraints under the Gold Standard. The alternative needs to be a system where business is allowed to prosper without too many government constraints, and yet there needs to be some constraints when it comes to the activities of a Federal Reserve.
Based upon my Australian experience of the Reserve Bank, I would offer the way in which it has to operate as an alternative. Australia was not as deeply affected by the Global Financial Crisis as elsewhere and I think that there are some very good reasons for this situation:
- banks do not give mortgage loans to families who do not have the ability to re-pay the loan;
- Statutory Reserve Deposits
- the RBA meets once a month and looks at the economic data. If it looks like inflation is heating up they attempt to apply the brake by raising interest rates (curses upon their decisions!!)