Larry White on lowering long-term risk

I’m taking Larry White’s Monetary Theory and Policy class this fall at George Mason University. Here’s a selection from his book, The Theory of Monetary Institutions on one interesting utilitarian argument for adhering to a gold standard.

A more reliable unit of account lowers the risk of long-term nominal contracts, as we have just noted with respect to bonds. Lower risk on long-term bonds encourages more long-horizon investment. When savers are more willing (do not demand so large a purchasing-power risk premium) to buy long-term bonds, a firm with a long-payback project, like a railroad company, can more cheaply sell bonds long enough to match the duration of its expected payoff stream from the real assets being financed. Such duration-matching eliminates the significant refinancing risk involved in relying on short-term debt, which is the risk that interest rates will be higher when the firm goes to roll over its debt. High-payoff long-horizon investment projects are therefore not shelved simply because of inflation risk, which undoubtedly aids economic growth, though the size of the effect would be hard to estimate.

A gold standard, then, has the effect of boosting confidence in money’s purchasing power in the long-term, thereby increasing general confidence in long-term investment and long-term bonds. Just a paragraph before, White explains that some railroad companies in the nineteenth century found willing buyers for 50- and 100-year bonds! Today, corporate bonds of 25 or more years are uncommon.

I recommend the book. Great so far.