by Alasdair MacLeod
Arguments about sound and unsound money often degenerate into a them-and-us dispute, with the supporters of unsound money casting sound money proponents as impractical out-of-date libertarian weirdos.
Supporting one side or the other as if they were opposing football teams does not represent constructive debate, which must be approached with an open mind.
This has now become crucial, because conventional and even unconventional monetary policies have demonstrably failed in their objectives, so it is time to look at the problem from another angle. This article does this by drawing on the implications of Gibson’s paradox, its recent resolutioni, and its apparent absence in the post-Volcker years.
Gibson’s paradox was the established correlation between wholesale borrowing costs (or its proxies) with the general price level, and the absence of any correlation between wholesale borrowing costs and the rate of price inflation. The paradox was evident in the UK for about two hundred years, the full extent of useful statistics, with possibly an even longer history. It is unarguable. This is illustrated in the following two charts, the first showing the correlation.