“What about [sc. endogenous money in] fixed exchange regimes (gold standard regime or dollar standard regime)? Mainstream economists argue that monetary policy is then impossible. Balance of payments deficits (surpluses) lead to foreign reserve losses (gains), and hence either lead or should lead to reductions (increases) in the monetary base and in the money supply, followed by endogenous hikes (cut-backs) in interest rates. In such a context, the money supply is endogenous, but it is supply-led, no longer demand-led. It is thus totally at odds with the post-Keynesian approach. It is also at odds with empirical facts.But even with these activist measures by certain central banks in the gold standard era, did the endogenous broad monetary systems meet the demand for credit?
Studies devoted to both gold standard periods have shown that the rules of the game did not apply whatsoever (Lavoie, 2001b). Increases or decreases in central bank foreign assets were compensated by fluctuations of central bank domestic assets in the opposite direction. This is the ‘compensation’ thesis, advocated in particular by French central bankers and Le Bourva (1992, pp. 462–3). Compensation is the rule rather than the exception. In standard terminology, fluctuations in foreign reserves were ‘sterilized’ or ‘neutralized’. Neutralization arose either automatically, at the initiative of the private sector, or naturally, as a result of the normal behaviour of the central bank to sustain the payment system. Thus, even in the gold standard period, fixed exchange rates did not prevent central banks from setting interest rates, while money creation was still demand-led.” (Lavoie 2006: 29).
The deflationary period from 1876 to 1896 that most countries experienced in the 19th century suggests that it did not (even though part of the explanation for the deflation appears to be price declines in many commodities as production in the Americas and Australia expanded).
Lavoie, M. 1992. “Jacques Le Bourva’s Theory of Endogenous Credit-Money,” Review of Political Economy 4.4: 436–446.
Lavoie, M. 2001. “The Reflux Mechanism and the Open Economy,” in L. P. Rochon and M. Vernengo (eds.), Credit, Interest Rates and the Open Economy. Edward Elgar, Northampton, MA, USA and Cheltenham, UK. 215–242.
Lavoie, M. 2006. “Endogenous Money: Accommodationist,” in P. Arestis and M. Sawyer (eds.). A Handbook of Alternative Monetary Economics. Edward Elgar, Cheltenham, UK and Northampton, Mass. 17–34.
Le Bourva, J. 1992. “Money Creation and Credit Multipliers,” Review of Political Economy 4.4: 447–466.