A Gold Standard with Free Banking Would Have Restrained the Boom and Bust

Abstract

President George W. Bush famously remarked in July 2008 that during the housing boom “Wall Street got drunk... and now it has a hangover.” It was the Federal Reserve that spiked the punchbowl. The Fed sowed the seeds for the bust of 2007-08 by overexpanding credit, keeping interest rates too low for too long. The Fed made these mistakes despite our having been assured that it had learned from past errors and that the art of central banking had been all but perfected. A commodity standard with free banking, and no central bank to distort the financial system, would have avoided such a boom-and-bust credit cycle.

Keywords: financial crisis of 2008, U.S. central banking, federal reserve bank, American financial policy, free banking

JEL Classification: E50, E52, E58, G01, H12, G28