Deflation Teaser? Klondike Bars and the Golden 90s in Canada

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Tags Money and BanksU.S. EconomyMoney and Banking

07/30/2014Mark Thornton

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Volume 6, No. 4 (Winter 2003)

In an age when deflation is widely feared and the threat of deflation serves as a justification for radical policy proposals, Bordo and Redish have done a great service in showing that deflation is not harmful to the economy, at least on the gold standard. However, they find an anomaly—a teaser—in Canada during the latter stage of the classical gold standard where positive monetary shocks led to positive shocks of increased economic output. The Klondike gold rush is offered here as the explanation for Bordo and Redish’s“surprising result.” All of the other factors (i.e., significant increases in land, labor,and capital) were no doubt important contributors to higher rates of economic

growth, but it is the Klondike gold rush, along with other gold discoveries in the U.S. and Canada that explains the anomaly. Ironically, both the teaser and its solution may rest with the same theoretical apparatus—the international old exchange mechanism. Economies with excess supplies of gold tend to experience higher prices and trade deficits in goods, while economies with excess demands for money tend to experience lower prices and trade surpluses.

This process, first discovered by Richard Cantillon and latter by David Hume, demonstrates that money, prices and trade in goods tend to balance or equilibrate between economies over time. The Bordo and Redish anomaly would seem to rest on the notion that this mechanism is always at or near equilibrium, while the solution recognizes that the mechanism is a time-consuming process subject to new shocks over time. Therefore, it would seem that even the pre-classical economists still have some thing to teach us about the modern economy.

Cite This Article

Thornton, Mark. "Deflation Teaser? Klondike Bars and the Golden 90s in Canada." The Quarterly Journal of Austrian Economics 6, No. 4 (Winter 2003): 111–116.