What is Gibson's paradox in simple terms?

In theory interest rates should relate to how fast prices are rising, but under the gold standard in Britain they moved with how high prices were, which is why the pattern was called a paradox.

Does Gibson's paradox still appear today?

The relationship weakened greatly after the gold standard ended, so many researchers see it as tied to particular monetary regimes such as the gold standard.

Gibson's Paradox

📈 Economics By CampusDown Wiki Editorial Team Last updated October 26, 2026

Gibson's paradox is the empirical observation that during the gold standard era in Britain and elsewhere, long-term interest rates were strongly and positively correlated with the price level itself rather than with the rate of inflation. Because standard monetary theory struggled to explain it, it was called a paradox; Keynes (1930) named it after the analysis of the British financial writer Alfred Gibson (1923).

Contents

1. Origins and the observation
2. Early interpretations and tests
3. The gold standard explanation and later debate
4. FAQ
5. References

Origins and the observation

Alfred Gibson (1923) reported that the yield on British consols and the wholesale price index had risen and fallen together for more than a century. In his Treatise on Money, Keynes (1930) called this one of the most completely established empirical facts in economics and named it Gibson's paradox. It is paradoxical because monetary theory suggests interest rates should be related not to the level of prices but to how fast prices are rising, that is, to inflation. There was no clear theoretical reason why a high price level should mean high interest rates.

Early interpretations and tests

Wicksell (1898) argued that gaps between the market rate of interest and the natural rate on capital generate credit expansion and price movements, and Keynes (1930) built on this to argue that interest rates and prices move together because bank rates respond slowly to changes in the natural rate. Irving Fisher (1930) interpreted the pattern as the result of people forming inflation expectations slowly, with long lags on past price changes, so that nominal interest rates come to resemble the price level. This can be seen as a lagged version of the Fisher effect. Sargent (1973) examined whether such interpretations were consistent with rational expectations, and Shiller and Siegel (1977) analyzed whether long swings in real interest rates could account for the correlation. Friedman and Schwartz (1982) also addressed the phenomenon in long-run US and UK data.

The gold standard explanation and later debate

Barsky and Summers (1988) noted that under the gold standard the price level is the inverse of the relative price of gold. When real returns rise, the opportunity cost of holding gold increases, demand for gold falls, gold loses value and the price level rises. Real interest rates and the price level therefore move together, an explanation that echoes the idea, central to Hotelling's rule, of treating gold as an asset. Benjamin and Kochin (1984) proposed that wartime government spending raised interest rates and prices simultaneously. The paradox gradually faded after the end of the gold standard and the onset of persistent inflation, supporting the view that it was closely tied to a particular monetary regime. Cogley, Sargent and Surico (2015) revisited the link between monetary regimes and the phenomenon through changes in UK price-level uncertainty.

FAQ

What is Gibson's paradox in simple terms?: In theory interest rates should relate to how fast prices are rising, but under the gold standard in Britain they moved with how high prices were, which is why the pattern was called a paradox.
Does Gibson's paradox still appear today?: The relationship weakened greatly after the gold standard ended, so many researchers see it as tied to particular monetary regimes such as the gold standard.

Sources reviewed: 2026-10-26

References

Gibson, A. H. (1923). The future course of high-class investment values. Bankers' Magazine, 115, 15–34.
Keynes, J. M. (1930). A Treatise on Money (Vol. 2). London: Macmillan.
Fisher, I. (1930). The Theory of Interest. New York: Macmillan.
Wicksell, K. (1898). Geldzins und Güterpreise. Jena: Gustav Fischer.
Friedman, M., & Schwartz, A. J. (1982). Monetary Trends in the United States and the United Kingdom. Chicago: University of Chicago Press.
Sargent, T. J. (1973). Interest rates and prices in the long run: A study of the Gibson paradox. Journal of Money, Credit and Banking, 5(1), 385–449.
Shiller, R. J., & Siegel, J. J. (1977). The Gibson paradox and historical movements in real interest rates. Journal of Political Economy, 85(5), 891–907.
Benjamin, D. K., & Kochin, L. A. (1984). War, prices, and interest rates: A martial solution to Gibson's paradox. In M. D. Bordo & A. J. Schwartz (Eds.), A Retrospective on the Classical Gold Standard (pp. 587–612). Chicago: University of Chicago Press.
Barsky, R. B., & Summers, L. H. (1988). Gibson's paradox and the gold standard. Journal of Political Economy, 96(3), 528–550.
Barsky, R. B. (1987). The Fisher hypothesis and the forecastability and persistence of inflation. Journal of Monetary Economics, 19(1), 3–24.
Mills, T. C., & Wood, G. E. (1994). Money substitutes and monetary policy in the UK, 1922–1974. European Economic Review, 37(1), 49–60.
Cogley, T., Sargent, T. J., & Surico, P. (2015). Price-level uncertainty and stability in the United Kingdom. Journal of Economic Dynamics and Control, 52, 1–16.
Bordo, M. D., & Schwartz, A. J. (Eds.). (1984). A Retrospective on the Classical Gold Standard, 1821–1931. Chicago: University of Chicago Press.

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This article was last updated on October 26, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.