The restoration of the gold standard after the US Civil War: A volatility analysis

• We evaluate volatility of the daily gold exchange rate of the greenback, 1874–1879.
• Our model predicts a low volatility switch if investors trust in gold resumption.
• This switch is found seven months before the actual resumption on January 1, 1879.
• Fundamentals became irrelevant as investors prepared for a fixed exchange rate.
• Policy makers anchored beliefs despite a highly uncertain political environment.

This paper presents a new view on the gold price of greenbacks during and after the American Civil War by analyzing exchange-rate volatility rather than exchange-rate levels. Our empirical investigation detects regimes of high and low volatility alternating in a way that is consistent with a theoretical exchange-rate model in which the rate is primarily driven by investors’ expectations and not by fundamentals. We interpret these findings as evidence that monetary policy makers were surprisingly able to credibly announce the resumption to gold half a year before it actually took place on January 1, 1879. Given the intense political debate about the appropriate design of the United States’ financial system, this is a remarkable result. It indicates that the policy makers’ ability to anchor investors’ expectations is relevant to achieving asset-price stability as well as effectiveness of financial market regulation. The insights from this historical episode should therefore be of interest to policy makers and regulators combating financial crises like the ongoing current debt crises worldwide.