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. ALURDIC
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t~~ Federal Reserve Bank of Dallas
EI Paso· Houston· San Antonio
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March 1981
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1
Back to Gold?
12
"Fed Quotes"
14
Regulatory Briefs and Announcements
16
Now Available from the Federal Reserve
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Back to Gold?
By James G. Hoehn
Recently, there has been a surprlsmg revival of
interest in reestablishment of a gold standard. The
gold standard had been widely regarded as a dead
issue even before the time of the collapse of the
Bretton Woods system of fixed exchange rates. In
the early 1960's, one gold advocate recognized that
his stand was courting the risk "of being classified
with the dodo bird."!
Increasing dissatisfaction with the events of the
1970's is among the factors responsible for renewed interest in gold. During the past 10 years
the consumer price index has doubled. The inflation rate and interest rates have risen well above
10 percent per year. Exchange rates have been
subject to wide fluctuations, and the United States
has endured recurrent balance-of-payments deficits
and a depreciating dollar.
Whether or not monetary mismanagement is responsible, many have questioned the ability of
discretionary monetary policy to perform better
than some more automatic rule. Among the reforms suggested are those that would keep some
monetary or reserve aggregate growing at a constant rate, fix the foreign exchange value of the
dollar, or peg the price of gold-which is the essence of the gold standard. Each of these proposals
intends to prevent continuing inflation by placing
limits on the creation of money. The Federal Reserve would be bound by some legal constraint
that provides the money supply and general price
level with a "nominal anchor." The absence of
1. Murray N. Rothbard, "The Case for a 100 Per Cent
Gold Dollar," in In Search of a Monetary Constitution, ed.
Leland B. Yeager (Cambridge, Mass.: Harvard University
Press, 1962), p. 94.
March 1981/Voice
such an anchor is alleged to account for the acceleration of inflation that occurred when the gold
link and fixed exchange rates were eliminated. 2
The purpose of this article is to contrast the
operating characteristics of a gold standard with
those of a discretionary regime. Such an analysis
is helpful when evaluating policy choices. However, policy recommendations depend on value
judgments as well as analysis of the facts. Most
proponents of a return to a gold standard hold to
normative judgments and political philosophies
that strongly disfavor the delegation of discretionary powers to the central authorities.
It is concluded that although monetary conditions were as stable in the gold standard era as
they are today, unique circumstances smoothed
the functioning of the earlier system. Under current conditions, restoration of the gold standard
would probably result in greater monetary instability than now prevails.
Gold standards require policy discipline
Because "the gold standard" means different things
to different people, it is important to understand
what variants are possible and how they operate.
The elementary requirement is a fixed price of
gold.
2. A discussion of the "nominal anchor" concept is found
in Robert J. Barro, "U.S. Inflation and the Choice of
Monetary Standard" (unpublished paper prepared as part
of the National Bureau of Economic Research Project on
Inflation, supported by the National Science Foundation,
and for presentation to the Conference on Inflation,
Washington, D.C., October 10, 1980; September 1980).
1
A strict gold standard also requires that a
country's money stock be linked more or less
rigidly to the quantity of monetary gold. Each dollar of the central bank's liabilities (that is, official
currency outstanding plus commercial bank deposits at the central bank) must be backed by
some dollar value of gold: The reserve backing
ratio is the proportion of the value of these liabilities that must be held as gold reserves, measured at the official price. A fractional reserve gold
standard permits issuance of more liabilities than
the value of the monetary gold stock, but a 100percent gold standard permits no issuance beyond
the value of the gold stock.
To maintain a constant gold price, the central
bank must "make a market" for gold by offering
to buy and sell unlimited quantities at a set price.
Gold reserves increase when agents sell their
gold for dollars. Gold reserves decline when holders of the dollars redeem them in gold. The central
bank must passively accept these changes in gold
reserves and must adjust its liabilities, in proportion, if it is to maintain a fixed reserve backing ratio.
For example, an increase in gold reserves requires a corresponding increase in central bank
liabilities. The bank's purchase of the gold with
dollars represents an increase in its liabilities equal
to the gold stock increase. Under a 100-percent
reserve system, the central bank cannot create
any further liabilities. Under a fractional system,
any inflow creates an oversufficiency of reserves
and, hence, requires a multiple expansion of liabilities. If the reserve fraction is A, liabilities must
be expanded by a total of (l/A) times the gold
inflow. This can be accomplished by the purchase
of any assets (bills, bonds, foreign exchange) other
than gold or by lending to the banking system.
The smaller the reserve backing ratio, the higher
is the level of central bank liabilities for a given
monetary gold stock.
Central bank liabilities plus circulating gold coins
constitute the monetary base, upon which is built
the country's money stock. If commercial banks
themselves have fractional reserve requirements,
this base can be multiplied in the usual textbook
fashion into a larger money stock. If, then, both
3. In practice. the liabilities subject to reserve backing
requirements varied from one country to another. For
example. some reserve requirements were based only on
currency issued, while others were based on other
liabilities as well.
2
the central bank and commercial banks have fractional reserves, the gold stock becomes the base for
a twice-multiplied money stock.
Many gold advocates point to the fragility of
such a system in the face of a wave of gold redemptions as a sufficient argument for the 100percent gold standard, under which only gold and
currency and deposits fully backed by gold would
circulate as money. A 100-percent system would
eliminate banking as it is known today, for banks
would be unable to lend any part of the demand
deposits entrusted to them.
Many gold advocates consider the 100-percent
system as impractical and unnecessary. A fractional reserve system allows banks to operate much
as they do today. Some advocate no reserve requirements at all for commercial banks, which
would be constrained only by prudence, the need
to maintain the confidence of depositors, and the
legal responsibility to honor requests for gold
redemptions.
Many who argue in favor of restoration of gold
convertibility of the dollar do not want a rigid link
between the gold stock and the money stock. They
see the full convertibility requirement as an adequate constraint on central bank policy. Gross
misbehavior would threaten public confidence, and
currency redemptions would follow, rapidly narrowing the margin for discretion. But the authorities would retain some latitude for attempting to
dampen the business cycle and for neutralizing
the effects of short-run balance-of-payments disequilibria on the money supply.
World monetary conditions determine
a country's price level and money stock
under an international gold standard
The general price level and the money stock are
determined in very different ways, depending on
whether a gold standard is domestic or international. An international gold standard arises if
the world's major trading countries fix the gold
value of their currencies, which then implies a
set of fixed exchange rates. Under any system of
fixed exchange rates, a central bank that attempts
to expand the money supply beyond residents'
desired balances will face a balance-of-payments
deficit. A fractional reserve system requires contraction of the money stock by a multiple of the
deficit. If the central bank does not reduce the
Federal Reserve Bank of Dallas
monetary base and money stock in full proportion
to the reduction in monetary gold, it risks continued deficits, cumulative gold losses, and, ultimately, exhaustion of the gold stock.
Under an international gold standard the price
level in a country, in terms of gold, is dictated by
the world commodity markets. This price level, in
turn, determines the amount of money residents
need to carry out their transactions, given their
real income and velocity of money. For example,
an increase in prices in other major trading countries raises the level of domestic prices through
commodity arbitrage. This, in turn, raises transaction needs for money. The country will acquire
additional gold reserves through a temporary excess of receipts over expenditures-that is, by
running a balance-of-payments surplus. The increased gold reserves permit an expansion of the
money supply to meet the increased demand.
The world price level then, given domestic real
income and velocity, dictates the domestic money
stock. The world price level, in turn, reflects the
world money supply, income, and velocity. Any
factor that increases the world's money supply,
according to the quantity theory of money, will
raise the price level in proportion, other things the
same.
The world money supply is determined by the
legal convertibility price of gold, the ratio of
money to the gold stock, and the stock of monetary
gold. An increase in the price of gold, which of
course constitutes "debasement," raises the nominal value of gold reserves and, hence, permits
expansion of the money supply for a given reserve
backing ratio. An increase in the ratio of money to
gold (a decrease in the gold reserve ratio) also
allows an expansion in the world money supply.
An increase in monetary gold stocks, due to new
production in excess of the private nonmonetary
consumption of gold, permits expansion in the
world money supply.
A change in determinants of the demand for
money, for a given supply, also alters the world
price level. For example, increases in real income
or decreases in the velocity of money are associated with a rise in the demand for money and,
thus, have a deflationary effect on the world price
level. (See the Appendix for a mathematical treatment of the determination of the world price
level.)
The major countries of the world participated in
March 1981/Voice
an international gold standard between 1879 and
1914. Prices fell until 1896 because the growth in
the demand for money exceeded the increase in
supply. Gold discoveries in the 1890's in the Klondike-Yukon and South Africa, as well as the new
cyanide process of refining gold, irj.creased the
world money stock and led to rising prices after
1896.
Money supplies were also expanded during the
brief period of the international gold standard by
an increase in the ratio of money to gold. Because
a unit of deposits absorbs less of the monetary
base than does currency, the rapid growth of
checking account banking raised the ratio of money
to the monetary base. Central banks in later periods
raised the ratio of the monetary base to gold, which
also inflated the money supply for a given stock
of gold. This expansion of the base-gold ratio resulted partly from the substitution by central banks
of foreign exchange (pounds sterling, francs, and
marks, which were convertible into gold) for gold
itself as a reserve medium. The shift to foreign
exchange reserves was especially pronounced during the inflation era beginning just prior to the
turn of the century.
Central banks did not maintain
a rigid link to gold
In practice, central banks did not adhere to a
strict gold standard. As one manifestation of this
nonadherence, they did not reinforce the effects
that changes in the balance of payments had on
the monetary base and money stock. For example,
a loss of gold or other foreign exchange reserves
due to a balance-of-payments deficit should have
been accompanied by a multiple contraction of the
monetary base. The typical response, however,
was to neutralize, in part, the reduction in the
monetary base arising from the payments deficit. 4
4. This is the conclusion Arthur 1. Bloomfield reached in
Monetary Policy Under the International Gold Standard:
1880-1914 (New York: Federal Reserve Bank of New York,
1959) after studying the behavior of 11 European central
banks. Donald N. McCloskey and J. Richard Zecher
reached a similar conclusion with regard to the United
States and the United Kingdom in "How the Gold
Standard Worked, 1880-1913," in The Monetary Approach
to the Balance of Payments, ed. Jacob A. Frenkel and
Harry G. Johnson (Toronto and Buffalo: University of
Toronto Press, 1976; reprinted in paperback, 1977),
pp. 357-85.
3
Prices under the gold standard were erratic but did not display
the long-run inflationary trend of recent times
RATIO SCALE
80(1926=100)--------------------70WHOLESALE PRICE INDEX
60 -
50 -
40
-.,...---..,...-----.,r-----r---......,---"T"'"--""""T--"""T'"1879
1885
1890
1895
1905
1900
1910
1914
280 (1967= 100) - - - - - - - - - - - - - - - - - - - - -
240 PRODUCER PRICE INDEX
200 -
160 -
120 -
100 -
80
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1951
1955
1960
1965
1970
1975
1980
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis.
U.S. Department of Commerce, Bureau of the Cel)sus.
Federal Reserve Bank of Dallas.
4
Federal Reserve Bank of Dallas
Table 1
LONG·RUN PRICE MOVEMENTS IN UNITED STATES
(Annual inflation rates, in percent)
Recent era
Gold standard era
1971·80
1951·80
1879·96
1896·1914
1879·1914
1951·64
1964·71
GNP implicit price deflator ...
'-2.22
1.95
'0.76
1.88
4.04
7.06
3.99
Consumer price index .......
-.66
1.04
.21
1.36
3.88
8.22
4.06
Producer price index,
all commodities' .........
-1.64
2.14
.28
.30
2.67
10.00
3.80
1. 1889·96 only
2. 1889·1914 only
3. Wholesale price index before March 1978. To construct a continuous series, the wholesale price index was taken as .6854 times
the Warren·Pearson index for 1879·90 and as the U.S. Bureau of Labor Statistics index for 1890·1914.
SOURCES: International Monetary Fund.
U.S. Department of Commerce, Bureau of Economic Anaiysis.
U S Department of Commerce, Bureau of the Census.
Federal Reserve Bank of Dallas.
Another less direct way to examine central bank
performance is to estimate statistically the closeness and constancy of the relation between the
money stock and the gold stock. The results of
regression analysis of U.S. data indicate that a
change in the gold stock was typically associated
with a proportionately smaller change in money.
There was also a slight tendency for the ratio of
money to gold to increase over time. For example.
the following equation fitted over the 1879-1914
period shows the relation between annual changes
in gold and annual changes in money:
.:lIn M t = .040 .424 .:lIn (PgCmlt
et.
(5.4) (6.1)
(t statistics in parentheses)
R2 = .5261; SE = .036.
where M is the M-2 money measure (currency outside the U.S. Treasury and bank vaults plus demand and time deposits at commercial banks). Pg
is the price of gold. and cm is the monetary gold
stock. The hypothesis that .:lIn M t = .:lIn (PgCm)t
(that the reserve backing ratio was constant) may
be rejected at a significance level of .005.
+
+
Monetary conditions surprisingly stable
under the historical gold standard
One important issue in the controversy over the
gold standard is whether such a system will provide more stable monetary conditions than a managed money regime. A simple comparison between
the 1879-1914 era and the 1951-80 era. following
March t9lt/Voice
the Treasury-Federal Reserve Accord of 1951. indicates that long-run price stability was superior
under the gold standard (Table 1). The consumer
price index computed by the U.S. Bureau of Labor
Statistics was virtually unchanged over the early
period. rising from 28 percent of the 1967 base to
30.1 percent. The recent period saw an annual
inflation rate of over 4 percent. the index rising
from 48.3 percent of the 1975 base in 1951 to 153.1
percent in 1980.
Interestingly. the rate of money growth was approximately the same under the gold standard as
later. Money grew at a compound rate of 6.8 percent. compared with 7.1 percent in the more recent
period (Table 2). The rapid growth of money under
the gold standard was not associated with longrun inflation because of the rapidly increasing
demand for money (decreasing velocity). In the
1951-80 period. increasing velocity aggravated the
inflationary impact of rapid money growth.
The long-run stability of prices was reflected in
the relative stability of long-term interest rates in
the gold standard era (Table 3). Average annual
railroad bond yields ranged from 3.83 percent to
5.98 percent and sustained an average annual absolute change of only 13 basis points from 1879
to 1914. By contrast. the 1951-80 period saw longterm Government bond yields range from 2.52 percent in 1954 to 11.39 percent in 1980. reflecting
increasing long-run inflationary expectations. The
average annual absolute change was 44 basis
points. For Aaa-rated corporate bonds the range
5
Table 2
MONEY GROWTH IN UNITED STATES
(In percent)
Recent era
Gold standard era
1879·96
1896·1914
1879·1914
1951·64
1964·71
1971·80
1951·80
Annual growth rate for M·2
money measure'
.
5.83
7.66
6.77
4.95
7.43
10.11
7.13
Standard deviation
.
6.46
3.87
5.27
2.05
2.36
2.14
2.98
1. For 1879·1914. currency outside U.S. Treasury and bank vaults plus demand and lime deposits at commercial banks; for 1951·59.
same concept as for 1879·1914 bUl also includes foreign demand balances at Federal Reserve banks; for 1959·80, the current
definition as described in "The Redefined Monetary Aggregates," Federal Reserve Bulletin, February 1980.
SOURCES: Board of Governors, Federal Reserve System.
Cltibank.
US. Department of Commerce, Bureau of the Census.
federal Reserve Bank ot Dallas.
Table 3
INTEREST RATE FLUCTUATIONS IN UNITED STATES
lin percent)
Average
yield
Standard
deviation
of yield
Average
annual
absolute
change
0.52
1.15
0.13
.91
2.32
2.43
2.54
.44
.46
1.00
1.50
1.14
Gold standard era, 1879·1914
Long·term railroad bonds ....•...•......
4.46
Prime commercial paper (4· to 6·month)' ...
5.35
Recent era, 1951·80
Long·term U.S. Government bonds
.
Aaa corporate bonds (Moody's) •..•......
U.S. Treasury bills (3·monlh) .•..•........
Federal funds'
.
Prime commercial paper (4· 10 6·monlh)3 .
5.36
5.82
4.46
5.34
5.16
3.06
2.71
1. 1890·1914 only.
2. 1955·80 only.
3. From November 1979 on, 6·month notes.
SOURCES; Economic Report of the Prestdent, January 1981.
International Monetary Fund.
U.S. Department of Commerce, Bureau of the Census.
Federal Reserve Bank of Dallas.
6
Federal Reserve Bank of Dallas
Table 4
SHORT·RUN PRICE VARIABILITY IN UNITED STATES
(In percent)
Standard
deviation
Average
annual
absolute
change
Average
annual
change
of annual
change
0.76
2.85
Consumer price index .. . . . . . . . . . . . . . . .
.21
2.16
Wholesale price index. . . . . . . . . . . . . . . . .
.28
5.54
1.50
1.27
4.51
Gold standard era, 1879·1914
GNP implicit price deflator'. . . . . . . . . . . . .
Recent era, 1951·80
GNP implicit price deflator. . . . . . . . . . . . .
3.99
2.50
3.99
Consumer price index. . . . . . . . . . . . . . . . .
4.06
3.45
Producer price index, all commodities' . . .
3.80
4.96
4.07
4.15
1. 1889·1914 only.
2. Wholesale price index before March 1978
SOURCES: International Monetary Fund.
U.S. Department of Commerce, Bureau of Economic Analysis.
U.S. Department of Commerce, Bureau of the Census.
Federal Reserve Bank of Dallas.
was 2.86 to 11.94, with an average absolute change
of 46 points.
It might be expected that short-run monetary
instability was greater during the earlier period,
since the era was marred by bank panics and
liquidity squeezes that have since been eliminated
through deposit insurance and establishment of
the Federal Reserve System. Certainly, the money
stock showed a more erratic pattern. The standard
deviation of annual percentage changes in M-2 was
5.3 from 1879 to 1914 and only 3.0 from 1951 to
1980. However, this does not indicate that monetary shocks were great under the gold standard.
Changes in a country's money stock under any
system of fixed exchange rates are more the consequences of changes in the demand for money
than an independent source of instability. Some
of the extra variability, however, might be attributed to liquidity crises, which were a probable
consequence of the gold standard. Many now
believe deposit insurance could have eliminated
these crises or reduced their frequency and
severity.
An alternative measure of short-run monetary
instability would be the volatility of short-term
interest rates. In the early period the annual absolute change in the commercial paper rate was
91 basis points, slightly lower than the 114 points
in the later period. The contrast is less pronounced
than for long-term interest rates but reflects the
March 1981/Voice
same phenomenon of increasing inflationary expectations in the later era.
Similarly, and for the same reason, annual price
changes were typically smaller in the early period
(Table 4). Price movements might have been more
difficult to predict in advance, however, because
the distribution of annual price changes included
frequent and often sizable negative values. In the
later period, price changes seemed to have a floor
at zero. The implicit deflator for the gross national
product rose each year of the 1951-80 period.
Short-run monetary stability is no better today
than it was in the gold standard period. This result
is surprising and difficult to explain in view of
the greater present-day stability of the banking
system.
Current conditions unfavorable to a gold link
If the gold standard were to be reinstated here,
prices would be determined by the supply and
demand for money within the United States and
in those countries that chose to join the United
States in pegging their currencies to gold. While
this country would be a proportionately larger
member of a new "gold club" than in the old one,
it would still be subject to foreign monetary
influences.
However, the monetary gold stock, and hence
the money supply and price level, would be subject
7
f
to very different influences. Gold production in
earlier times could be depended on to increase
whenever deflation occurred, since that lowered
production costs and made production more profitable. As it raised the money supply, increased gold
production tended to halt or slow deflation. Likewise, inflation tended to reduce production and
brake monetary growth. Thus, the profit-making
motive of gold producers promoted the long-run
stability of prices.
Today, most gold production is controlled by the
governments of South Africa and the Soviet Union,
which limit their gold sales according to considerations other than this profit motive. There can be
no presumption that their actions would tend to
stabilize world monetary conditions under a new
gold standard. Since gold production outside these
countries has peaked as known deposits near exhaustion, gold stock increases adequate to match
world output growth cannot be expected.
Nearly unique historical conditions were favorable to the smooth operation of the gold standard,
conditions that do not prevail today.5 For one
thing, currency parities, rather than being abruptly
and arbitrarily imposed, reflected purchasing
power parities that evolved gradually. Unsustainable currency parities in the period between the
two world wars created severe international disequilibria and depressed areas. It is difficult to
guess what set of currency parities would be sustainable under the fixed rates that must accompany
an international gold standard.
Second, prices and wages in the gold standard
era were more downwardly flexible, facilitating
the adjustment to deflationary pressures without
reductions in output and employment. There was
no discernible difference in real economic growth
in the United States between the deflationary and
inflationary segments of the era.
Third, fiscal authorities exercised "prudence" in
that they avoided spending in excess of taxes,
which simplified the pursuit of stable monetary
conditions. The size of Government was far
smaller than it is today; thus, fiscal operations
had less potential for destabilizing credit markets.
Fourth, the period was one of relatively calm
5. These conditions are colorfully recounted in Leland B.
Yeager, International Monetary Relations: Theory,
History, and Policy, 2d ed. (New York: Harper & Row,
1976), pp. 307-9.
8
social and political conditions. The deflationary
episode of 1879-96 did generate a silver inflationist
movement in the United States, but the Government was able to allow the deflation required to
maintain gold convertibility. This was due to a
widespread "monetary religion" and a belief in
the justness of convertibility of the dollar into
gold at pre-Civil War parity. It is doubtful that
the current political system would not capitulate
and abandon the gold standard under a similar
extended deflation. 6
International relations were relatively tranquil,
with local wars but no widespread altercations.
Wartime deficit financing needs and the inflationary pressures of war inevitably lead to at least
temporary suspension of gold redemption privileges. For example, the gold standard was suspended by Britain during the Napoleonic Wars, by
the United States during the Civil War, and by
most of the major countries during World War 1.
It appears that the international disturbances were
weaker in impact than those of today, price increases by the Organization of Petroleum Exporting Countries being a prime example.
Conclusion
Those who advocate a gold standard must recognize its operating characteristics. A gold standard
does not imply stable prices. There were long
periods of inflation and deflation during the
years in which the gold price was fixed.
Under a gold standard the money supply would
be more volatile and subject to the gold sale
policies of South Africa and the Soviet Union.
Depressions might be a periodic feature of the
system unless major institutional and legal changes
were made to promote wage and price flexibility.
Inflationary pressures of a war and attendant
deficit financing would cause a breakdown.
Under present circumstances, a gold standard
might prove unsustainable. No policy is self6. Milton Friedman and Anna Schwartz state abandonment of the gold standard would have been preferable to
the depressed conditions of the 1890's, which were
associated with price deflation. While economically
desirable, abandonment "was politically unacceptable."
See Milton Friedman and Anna Tacobson Schwartz, A
Monetary History of the United States, 1867-1960
(Princeton: Princeton University Press, 1963), p. 111.
Federal Reserve Bank of Dallas
enforcing; each depends on official and popular
support. Such support, in turn, depends on the
perception of the costs and benefits of adopting
and adhering to the policy. It would be easier to
sustain support for an appropriate discretionary
policy to promote price stability than for an in-
flexible gold standard regime. A return to gold
might squander a developing consensus to stop
inflation. Finally, it should be recognized that
merely fixing the price of gold does not prevent
policy discretion, as shown by the actual behavior
of central banks during the 1879-1914 period.
Appendix
A Model of the Price Level
Under a Gold Standard
in a Closed Economy
In this closed-economy model the general
price level, the money stock, and levels of
the monetary and nonmonetary gold stock
are determined by the total stock of gold, the
legal gold price, the gold reserve backing
ratio, the proportion of nominal income held
as money, and the real income leveP The
model can be applied to the analysis of either
the world under an international gold
standard or a single country under the gold
standard with floating exchange rates.
DEFINITIONS
Independent variables
G : : : stock of available gold, in physical units.
Pg ::::: legally mandated price of gold.
y ::::: real income or output.
A == PgGm/M : : : gold reserve backing ratio.
k == M/Py ::::: proportion of nominal income held as
money (inverse of velocity of money).
Dependent variabias
Gill ::::: monetary gold stock, in physical units.
Gn ::::: nonmonetary gold stock, in physical units.
P ::::: general price level.
M ::::: money stock.
Gold sector
The total stock of gold, G, is regarded as
fixed. This stock comprises the monetary gold
stock, Gm, and the nonmonetary stock
demand, G":
(1) G
= Gm + G".
The nonmonetary stock demand for gold
depends on its relative price and on income:
(2) G" = [a + f3 (P !Pg)]y,
f3 > O.
The remainder of the total stock of gold is
sold to or deposited with the monetary
authorities and constitutes the monetary
gold stock.
Monetary sector
The monetary gold stock, Gm, is used as the
monetary base. Suppose that A dollars'
worth of gold is held as reserves for each
1. A model in which the total gold stock is influenced
by gold production is presented in Robert J. Barro,
"Money and the Price Level Under the Gold Standard,"
Economic Journal 89 (March 1979) :13-33.
March 1981/Voice
dollar of the money stock. Then:
(3) PgGm = AMs,
0 < A::::;; 1,
where MS is the quantity of money supplied.
The money supply function is:
(4) MS = A-1PgGm.
The money demand function is:
(5) M d = kPy,
where M d is the quantity of money demanded
and k is the proportion of nominal income
held as money, or the inverse of velocity.
Money market equilibrium requires:
(6) M S = M d ,
which implies:
(7) A-1PgGm
=
kPy.
From this we can find an expression for
the price level:
(8) P = PgGm(Akyt1 •
Equation 8 shows that the price level is
proportional to the monetary gold stock,
Gm, other things the same. By rewriting
9
Price level equilibrium requires
that gold uses equal the gold stock
RELATIVE
PRICE
LEVEL,
P/P g
GOLD QUANTITY
equation 7, we have:
(9) G'" = (P/Pg).\ky.
Equilibrium price level
Now the price level resulting under a gold
standard can be determined. By substituting
equations 9 and 2 into equation 1, we arrive
at:
G'"
G(10) G
which simply states that the monetary and
nonmonetary uses of gold must be equal to
the total available supply.
The accompanying diagram illustrates
equation 10. The total supply, G, is a vertical
line because it is regarded as fixed, regardless
of the price level's ratio to the fixed gold
price. The quantity of monetary gold is
proportional to the price level; hence, G'"
depends positively on (P/P g). G" is also
positively related to (P/P g). The curve for
the total of Gm and G" (Gm + G") is found by
summing the curves horizontally.
There is only one ratio of the price level
to gold's price that equates the quantity of
gold in both uses with the available supply.
This price occurs at the point where the G
and Gm + G" curves intersect and has been
labeled (P/Pg)e. The price level is simply this
relative price level times Pg •
The equilibrium price level can also be
seen algebraically by solving equation 10
for P:
(11) P = Pg(G - ay)[(,8 + .\k)y]-l.
= (P/Pg).\ky + [a + ,8(P/P,)]y,
New Member Banks
Security National Bank, Amarillo, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business February 2, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000,000. The officers are: Tom Patterson,
Chairman of the Board and President; Jeff Brown, Assistant Vice President;
and Frank O. Nelson, Cashier.
10
Federal Reserve Bank of Dallas
New Member Banks
First National Bank of Cedar Park, Cedar Park, Texas, a newly organized
institution located in the territory served by the San Antonio Branch of
the Federal Reserve Bank of Dallas, opened for business February 2, 1981,
as a member of the Federal Reserve System. The new member bank opened
with capital of $575,000 and surplus of $575,00. The officers are: Monroe
Bethke, Chairman of the Board; Virginia Straughan, President; Robert Bacon,
Executive Vice President; Nelda Milliken, Vice President and Cashier; Sue
Daniel, Vice President; Joy Alley, Vice President; Linda Taylor, Vice
President; and Dorothy Peterson, Assistant Cashier.
Bent Tree National Bank, Addison, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business February 9, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,500,000 and surplus of $1,500,000. The officers are: Arthur Z. Barnes,
Jr., Chairman of the Board; Michael K. Sanders, President; and Pamela L.
Morris, Cashier.
Bank of San Felipe Green, N.A., Houston, Texas, a newly organized institution located in the territory served by the Houston Branch of the Federal
Reserve Bank of Dallas, opened for business February 9, 1981, as a member
of the Federal Reserve System. The new member bank opened with capital
of $1,250,000 and surplus of $1,250,000. The officers are: Robert C. Baldwin,
President and Chief Executive Offcer; Kirk B. Whitehouse, Vice President
and Cashier; J. Bradley Duff, Vice President; Linda Judge Murphy, Assistant
Vice President; and Joe Neal, Jr., Assistant Vice President.
Westhollow National Bank, Houston, Texas, a newly organized institution
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business February 9, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000,000. The officers are: Charles Noble,
Chairman of the Board and President, and Ronald Banks, Vice President
and Cashier.
Commerce Parkway Bank, N.A., Addison, Texas, a newly organized institution located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business February 12, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,500,000 and surplus of $1,500,000. The officers are: Maury Jaffer, Chairman
of the Board; Carl L. Colgin, President; Bobby W. Hackler, Senior Vice
President and Cashier; and Pat D. Greer, Commercial Banking Officer.
Allen National Bank, Allen, Texas, a newly organized institution located
in the territory served by the Head Office of the Federal Reserve Bank of
Dallas, opened for business February 21, 1981, as a member of the Federal
Reserve System. The new member bank opened with capital of $750,000 and
surplus of $750,000. The officers are: Don E. Brazeal, Chairman of the
Board; Dan J. Jackson, President; and Kim T. Becker, Vice President and
Cashier.
March 1981/Voice
11
••GFed Quotes ~~
Brief Excerpts from Recent Federal Reserve Speeches. Statements, Publications, Etc.
"Given enough time, sluggish business performance should itself tend to restrain
inflation. But our objective as a nation must be to speed the disinflationary process.
That will be a legitimate expectation only if we can succeed in changing attitudes and
policies across a broad range of public and private behavior. Only then can we
confidently anticipate that a relaxation of pressures on financial markets could be
sustained and that the stage will be set for full recovery and expansion.
"The task is both difficult and painful because patterns of inflationary behavior
are by now so deeply ingrained in individual attitudes that the process feeds on itself.
That will change only when there is a visible. sustained commitment to policies that
will in fact reduce the strong upward price thrust-and permit market processes to
penalize those speculating on inflation-even when those policies, in the short run,
entail risks and strains. Credibility in policy commitment will have to be earned by
performance maintained through thick and thin. That is one reason we in the Federal
Reserve take our own monetary and credit objectives so seriously-in setting realistic
targets in the first place, in explaining their implications and our methods for
approaching them, and in substantially meeting them over reasonable periods of time.
But monetary policy, indispensable as it is, is only one instrument. and as I have
emphasized, relying entirely on that instrument focuses the strains on financial
markets and those most dependent on them.
"The fiscal posture of the federal government is the most important of the other
instruments that can be brought to bear in changing both expectations and current
reality. That posture has several dimensions.
"The point has rightly been emphasized that the level of federal taxation itself
impairs incentives and adds to costs, and that taxes are not only high but rising. The
relevant question is not whether tax reduction is desirable in itself; it obviously is if
we want a healthy private economy. The real debate is how that desirable-even
necessary-objective can be achieved consistent with fighting inflation and reducing
the pressures on financial markets-pressures that could otherwise frustrate the
beneficial effects. The concern is not limited to reducing the immediate deficit,
important as that is as a source of current interest rate pressures. Even more significant in many ways is the forward planning necessary to assure that, as the economy
returns to more satisfactory operating levels, the financial position of the government
indeed returns to balance, making way for the private investment we need."
Paul A. Volcker. Chairman. Board of Governors of the
Federal Reserve System (Before the Committee on
Banking, Housing. and Urban Affairs, U.S. Senate,
January 7, 1981)
12
Federal Reserve Bank of Dallal
"Our basic objective is to increase productivity, to utilize efficiently more of our
human resources, and to resume economic growth. We can't do those things while
inflation moves higher. The longer we take to face up to the problem, the greater
the difficulty in the end. That seems to me the simple lesson of the 1970's."
Paul A. Volcker, Chairman, Board of Governors of the
Federal Reserve System (Before the Annual Meeting
of the American Farm Bureau Federation, New
Orleans, Louisiana, January 12, 1981)
"The decline in productivity is a familiar fact. Though all its roots are not fully
understood, I believe that in good part they are related to inflation. Inflation hampers
business investment, an important source of productivity, by distorting reported
profits; such distortion results in excessive taxes, thereby reducing the return on
investment. The uncertainty created by inflation raises costs, by requiring higher risk
premiums, and generally interferes with business planning. One major contribution
to increased productivity would be to lower the rate of inflation."
"For its part, the Federal Reserve is attempting to foster an environment that
should facilitate a reduction in overall inflation pressures and thus promote more
vigorous growth and prosperity. A reduction of inflation ... should make an
important contribution to productivity. Also, a lower inflation rate is the only feasible
way of reducing interest rates. An easier monetary policy might reduce interest rates
for a short period, perhaps on the order of a few weeks or months. But, as soon as
the inflationary implications of this policy became obvious to the market-and this
would not take long-interest rates would move up with expected inflation, as they
have done before. Thus, the Federal Reserve really has no option other than to exert
restraint in order to set the stage for the long-run gains in employment and productivity that we have every right to expect from the American economy."
Henry C. Wallich, Member, Board of Governors of
the Federal Reserve System (Before the Temporary
Subcommittee on Industrial Growth and Productivity
of the Committee on the Budget, U.S. Senate,
January 27, 1981)
March 1981/Voice
13
GReguJatory GJJriefs
andc.f/nnouncements
Board Publishes New Service
The Federal Reserve Board has announced publication of a new looseleaf service. Entitled "Federal
Reserve Regulatory Service," it will consist of
four publications and will ultimately include all
Board regulations and related interpretations and
documents.
The complete service will incorporate all Board
regulations and related materials. The three separate handbooks will cover securities credit, monetary policy, and consumer affairs.
The first part of the new service-the Securities
Credit Transactions Handbook-was published in
February. It contains Regulations G, T, U, and X,
dealing with extensions of credit for the purchase
of securities, plus related statutes, interpretations,
rulings, and staff opinions.
A similar handbook has been published on
Monetary Policy and Reserve Requirements, containing Regulations A, D, and Q as well as the rules
of the Depository Institutions Deregulation
Committee.
The other handbook pertains to Consumer and
Community Affairs and will include Regulations B,
C, E, Z, AA, and BB plus associated documents.
The four publications are individually priced,
and subscribers will automatically receive updates
at least monthly. All subscription requests should
be addressed to Regulatory Service Subscriptions,
Federal Reserve Board, 20th Street and Constitution
Avenue, N.W., Washington, D.C. 20551.
14
Regulation K:
Board Adopts New Interpretation
The Board of Governors of the Federal Reserve
System has issued an interpretation of Regulation
K (International Banking Operations) describing
the circumstances in which a U.S. banking organization will be permitted to invest in foreign companies, including foreign banks, that engage in
domestic business in the United States.
Under the interpretation, a U.S. banking organization would generally be given the Board's consent
for the investment if the following conditions were
satisfied:
• The foreign company is engaged predominantly in business outside the United States or in
internationally related activities in the United
States.
• The direct or indirect activities of the foreign
company in the United States are either banking
or closely related to banking.
• The U.S. banking organization does not own
25 percent or more of the voting stock of, or otherwise control, the foreign company.
In considering whether to grant its consent for
such investments, the Board will also review the
proposals to ensure that they are consistent with
the purposes of the Bank Holding Company Act
and the Federal Reserve Act.
Federal Reserve Bank of Dallas
Regulation c:
Board Proposes Revision
and Simplification
Regulation E:
Amendment Exempts
Overdraft Credit Plans
The Federal Reserve Board has requested public
comment on a revision and simplification of Regulation C, which implements the Home Mortgage
Disclosure Act. The act requires financial institutions located in standard metropolitan statistical
areas (SMSAs) to disclose publicly the location of
their residential mortgage loans.
The principal proposed revisions of Regulation
C would:
• Permit institutions that have been exempt but
lose the exemption to begin compiling data for the
year following the year in which the exemption is
lost, rather than for the year preceding the loss.
• Require disclosures of conventional loans and
of Federal Housing Authority, Farmers Home
Administration, and Veterans' Administration
loans but not the sum of the conventional and other
types of loans.
• Permit branches of institutions to cease
making disclosures of loans in the SMSA in which
the home office is located.
• Permit, but not require, branch office disclosures to omit all data relating to loans in SMSAs
other than that in which the branch office is
located.
• Permit institutions to omit the currently required annual notice to the public concerning the
availability of mortgage loan data.
In keeping with the Board's Regulatory Improvement Project, which calls for review and simplification of all its regulations, the Board has taken
this opportunity to simplify Regulation C, focus
disclosure requirements on those that are most
useful and that can be provided at reasonable cost,
and make the regulation more concise. The proposed regulation is nearly a third shorter than the
existing regulation.
Comments must be received on or before April
15 and should be mailed to the Secretary, Board of
Governors of the Federal Reserve System, Washington, D.C. 20551, with reference to Docket
No. R-0350.
The Federal Reserve Board has adopted in final
form an amendment to Regulation E, which implements the Electronic Fund Transfer Act. The
amendment allows creditors to debit their customer's accounts automatically for repayment of
preauthorized overdraft credit.
Under the act, creditors are prohibited from
making automatic repayment of loans a condition
of extending credit. However, the Board has
exempted overdraft credit plans from this prohibition as a means of facilitating the continued
extension of overdraft checking protection to
consumers by permitting the automatic collection
of repayments.
March 198t/Voice
15
(}VowcfivaiJabJe
Recently issued Federal Reserve circulars. speeches, statements to Congress, publications. etc., may
be obtained by contacting the Department of Communications, Financial and Community Affairs,
Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222, unless indicated otherwise. Requests
for circulars should specify the circular numbers.
Circulars
Holidays [All Federal Reserve banks and branches]. 1 p.
Circular No. 81-30 (February 6, 1981).
Interpretation of Regulation K (International Banking Operations): Investments by United States Banking Organizations in Foreign Companies. 2 pp. Circular No. 81-31
(February 9, 1981).
Revision to Bulletin 6 (Wire Transfers of Funds), with
Bulletin 6A (Schedule of Time Limits) and Bulletin 6B
(Fee Schedule for Transfers of Funds Services); Bulletin 6C (Fee Schedule for Net Settlement Services).
9 pp. Circular No. 81-32 (February 13, 1981J.
Amendment to Regulation B [Equal Credit Opportunity].
2 pp. Circular No. 81-33 (February 23, 1981).
Employee Retirement Income Security Act of 1974 (ERISA):
Reporting Procedures. 4 pp. Circular No. 81·34 (February 17, 1981).
Revised Regulation Q [Interest on Deposits] Pamphlet and
Supplement. 15 pp. Circular No. 81-35 (February 18,
Statement by Henry C. Wallich before the Subcommittee
on International Finance and Monetary Policy of the
Committee on Banking, Housing, and Urban Affairs,
U.S. Senate. 6 pp. February 17, 1981.
Statement by Nancy H. Teeters before the Subcommittee
on Consumer Affairs of the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate. 9 pp., including appendix. February 18, 1981.
Statement by Paul A. Volcker before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate. 13
pp., including tables. February 25, 1981.
Statement by J. Charles Partee before the Subcommittee on
Telecommunications, Consumer Protection and Finance
of the Committee on Energy and Commerce, U.S.
House of Representatives. 7 pp. February 26, 1981.
Pamphlets, Brochures, and Reports
1981).
Proposal to Establish International Banking Facilities in
U. S.: Extension of Comment Period. 2 pp. Circular
No. 81-40 (February 23, 1981).
Proposed Amendment to Regulation C [Home Mortgage
Disclosure]. 22 pp. Circular No. 81-41 (February 24,
1981).
Speeches and Statements
Statement by Paul A. Volcker before the Joint Economic
Committee of the U.S. Congress. 8 pp. February 5, 1981.
Statement by Nancy H. Teeters before the Subcommittee
on Consumer Affairs of the Committee on Banking,
Finance and Urban Affairs, U.S. House of Representatives. 3 pp. February 5, 1981.
Remarks by Henry C. Wallich ("Economic Policy and the
Need to Stop Inflation") at St. Cloud University, St.
Cloud, Minnesota. 10 pp. February 13, 1981.
16
Annual Report to Congress on the Equal Credit Opportunity Act for the Year 1980. Prepared by the Board
of Governors of the Federal Reserve System. 12 pp.
February 2, 1981.
Monetary Policy Objectives for 1981. Prepared by the
Board of Governors of the Federal Reserve System.
(Summary of report to the Congress on monetary
policy pursuant to the Full Employment and Balanced
Growth Act of 1978) 15 pp. February 25-26, 1981.
Pamphlet announcing Securities Credit Transactions Handbook. Issued by the Board of Governors of the Federal
Reserve System. (Describes a new looseleaf service of
the Federal Reserve Board and includes an order form)
4 pp. February 1981.
Federal Reserve Services. Published by the Federal Reserve
Bank of Dallas. (A pamphlet summarizing information
on reserve requirements and reporting and schedules
for access and pricing of Federal Reserve services and
also listing individuals at the Dallas Reserve Bank and
its branches to contact about specific operations) 6 pp.
March 1981.
Federal Reserve Bank of Dallas
@FedFRASER