The search for stable prices and the role of gold — CMRE

By Prof. Forrest Capie, Official Historian (Bank of England) —

How can stable prices be secured so that the economy can be allowed to deliver what it is capable of? There was a time when the question simply did not arise.  Money was tied to gold and stability prevailed. At the present time some monetary economists have moved to the other end of the spectrum, moved so far that not only is metal an irrelevance but money itself is no longer of importance.  History has lessons for those who suggest dispensing with monetary indicators, history would say, ‘not so fast’.

There is wide agreement that price stability is highly desirable.  Further, that there is no trade-off between inflation and output in anything other than the very short run, and even that is not clear.  Money growth in excess of the growth of output will eventually find its way into prices though there may be long and variable lags. I shall present briefly three kinds of historical evidence in support of the importance of money for stable prices. The first relates to the very long run.  The second takes some short-period extreme examples of inflation from history, and the third reminds us of the 1970s and what happens when the cause of inflation is forgotten.