Donald McCloskey and J. Richard Zecher wrote an article about the gold standard that fascinated Black, and in his opinion, helped him finish his theory of money. The important findings in this article were that, for the time period studied, "world commodity and capital markets (those studied were the United States, and Britain) were unified." Black used this to help confirm his "law of one equilibrium" which is that the relative prices of goods are determined by market forces without monetary factors. Black argued that governments should adopt a gold standard without actual gold coins, or an inventory system run by the government. Black wanted a "fiat gold standard."
A fiat gold standard would create a system that was pegged to gold and then change the peg as the domestic price level changes. What would happen is that as price levels rise, the price of gold drops and vice versa, avoiding the importing of inflation or deflation from different countries. As of 1981 Black felt that his theory of money was complete.
A for Braley.
ReplyDeleteLook at the big picture here. Black is arguing, at the time that flexible exchange was just starting, that flexible exchange rates will fluctuate a lot and that those fluctuations don't convey much information. This is exactly what we observe 35 years on: no matter what politicians think exchange rates may say, it can't be very much if they move so often.
Extra credit for the first person to comment with an explanation of whatever happened to Don McCloskey.
More extra credit for the first person with a separate comment on what fiat means in this context, and what fiat gold would then be. (Note, it only partially means that they hold no gold, as stated in the book).
Even more extra credit for the first person to explain what is meant by a "positive" description is, and how that applies to CAPM and international capital flows.