Sunday, March 22, 2009

The Allegory That Would Not Die

The BBC Online examines the Wizard of Oz as a monetary allegory. I was interviewed because of my paper “The Fable of the Allegory: the Wizard of Oz in Economics” Journal of Economic Education (Summer 2002). I said in the interview that there is no evidence that the Wizard of Oz was written as an allegory. Even those who advocate using it as a monetary allegory generally agree. See, for example, Ranjit Dighe’s book and reply to my paper. I also say that I am not convinced that the allegory adds to the understanding of monetary issues in the late nineteenth century. In particular, I don’t think it add to the understanding of support for the gold standard. In general support for the gold standard was not based on some superstitious notion that only gold could be money. People at the time had experience with gold and silver as well as paper money. Participation in the gold standard required that currency be convertible into gold at a fixed rate. Adherence to this requirement meant that control of the money supply was taken out of the hands of policy makers. When multiple countries adhered to the gold standard it also created a system of fixed exchange rates. Fixed exchange rates remove exchange rate risk and, other things equal, encourage foreign investment. Advocates of the gold standard recognized these benefits. The issues surrounding the adoption of the gold standard in 1900 are still relevant to today. Students can gain historical perspective on the adoption of the euro, and the use of fixed exchange rates or dollarization in less developed countries by studying the gold standard. I am not yet convinced that The Wizard of Oz adds to the understanding of economic history.

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