On the Wall Street Journal Op-Ed page (Trump’s Real Trade Problem Is Money ), John D. Mueller discusses the gold standard and claims something that I've either never heard before, don't understand, or both.

Many economists wrongly assume that total world net exports must equal zero, but in fact countries participating in the international gold standard had combined net exports equal to the total increase in world gold reserves (which in turn approximated world gold exports). As a result, world monetary policy was countercyclical: When the prices of other goods fell, the profitability of gold mining rose.

First, I thought it was tautological that global net exports had to be zero. Is Mueller's claim correct? Does it turn on a technicality of the definition of net exports? Please help me understand his position.

Second, is it accurate to characterize gold standard monetary policy as counter-cyclical? My understanding is that recessions in the gold standard era were marked by deflation where as in the fiat currency era recessions are merely dis-inflationary. If so, is it fair to call the gold standard substantially less counter-cyclical than fiat currency systems?

  • $\begingroup$ It is true that when price of things like food and other goods fall relative to the value of gold, this encourages more gold mining. So too do new cheaper sources of gold (as happens in gold rushes). But gold mining makes up a very small proportion of employment worldwide and is concentrated in specific areas, so tends to have local rather than wider employment effects, and does so whether or not there is a gold standard. $\endgroup$ – Henry Jan 25 '17 at 23:13
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    $\begingroup$ There is also a distinction in some trade statistics between commodity gold and monetary gold even if both can take the form of bullion bars: one country can export what it regards as goods, while the other country can receive what it regards as the equivalent of money and a financial flow rather than trade. $\endgroup$ – Henry Jan 25 '17 at 23:17

That depends on your model of the world, and on how you define "goods and services".

In a gold standard world, you essentially exchange goods and services with gold. Gold mining is therefore simply an expansion of the money supply. Adding gold to both the nominal and real side of the economy seems to me like today adding money as a good to GDP. If you do this, you get a positive trade balance. It makes a lot of sense to seperate monetary gold, which is on the monetary side, and commodity gold, on the goods side, as Henry mentioned in the comments.

In my opinion, it does not make sense to count gold twice. It seems reasonable to seperate the monetary and real side of the world, which then would yield a balanced world trade.

To the second question: I am no expert on gold mining, but I could imagine that it is not possible to "drive up" gold production in a recession. What is true is that a (nearly) constant money/gold supply leads to inflation being counter cyclical.


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