Romney, the Republicans, and the Gold Standard
It looks like the Republican Party will call for the creation of a national commission to examine restoring the link between the dollar and gold, a connection finally and completely severed in 1971.
Now if I were writing zingers for President Obama’s nomination acceptance speech, I would try this one out: “I’ve said before that Mr. Romney wants to take America back to the 1950s. Well, I was wrong. It turns out he and the Republican Party want to take America back to the 1850s and bring back the gold standard. You can’t make this stuff up!”
The issue does have that sort of feel about it to many people. Old fashioned. Backward looking. Odd.
But is it a bad idea?
First of all, what exactly are we taking about here? Robert Zoellick, now a Romney foreign policy adviser, caused a big stir in 2010 when, as president of the World Bank, he seemed to endorse some sort of global gold standard:
[The G20 should] build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.
The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.
Now Zoelick quickly clarified his statement and said he was not seeking a system where the amount of currency in circulation was linked the amount of gold reserves. But that does seem to be what some Republicans are calling for. This is from Ron Paul’s presidential web site:
If our money were backed by gold and silver, people couldn’t just sit in some fancy building and push a button to create new money. They would have to engage in honest trade with another party that already has some gold in their possession. Alternatively, they would have to risk their lives and assets to find a suitable spot to build a gold mine, then get dirty and sweaty and actually dig up the gold. Not something I can imagine our “money elves” at the Fed getting down to whenever they feel like playing God with the economy.
Paul is talking about true gold standard, not the version created by Bretton Woods and ended by President Nixon. Here is a brief backgrounder by my pal Martin Hutchinson of Reuters BreakingViews:
The arrangement born at Bretton Woods and used for nearly three decades was not a true gold standard, as it was entirely intergovernmental and the private holding of gold was illegal in America. It thus lacked the virtue of independence from political meddling, failed to provide anti-inflationary benefits and collapsed once its American sponsors no longer controlled the world economy.
The true gold standard, in which gold coins circulated freely as legal tender, was started in Britain in 1717 and lasted for just under 200 years, interrupted only during the Napoleonic wars.
Compared with an ideal, stable and noninflationary monetary system, free from influence by elected officials, the gold standard has two flaws. The metal’s supply is erratic. It can soar unexpectedly with new discoveries, thus causing currency values to fluctuate. Conversely, new deposits tend to be found slowly, making a gold standard excessively deflationary when population growth is rapid. That is what contributed to the standard’s breakdown after 1900.
I understand why some conservatives are fond of the idea of abandoning fiat money and returning to the gold standard, especially after the Great Recession and ongoing euro crisis — not to mention fears the growing national debt will prove inflationary or hyperinflationary. As George Bernard Shaw put it, “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect to these gentlemen, I advise you to vote for gold.”
But I am not there yet. As Milton Friedman famously said, ”Inflation is always and everywhere a monetary phenomenon.” Instead, I would prefer adjusting the mandate of the Federal Reserve so that monetary policy is less discretionary and more rule based.
One option is what could be called the “New Gold Standard,” the market-based targeting of nominal GDP. Economist Scott Sumner:
Most simply, the Federal Reserve should begin by adopting an approach of “level targeting” of nominal GDP. This doesn’t mean keeping NGDP level, but rather targeting a specified trajectory, such as a 5% NGDP growth path, and committing to make up for any near-term shortfalls or excesses. Thus, if NGDP grew by 4% one year, the central bank would cut rates or engage in quantitative easing until its models yielded an expectation of 6% NGDP growth for the following year. …
Another approach — which would be more radical, but perhaps also more effective — would limit the Fed’s role to setting the NGDP target, and would leave the markets to determine the money supply and interest rates. This would mitigate the “central planning” aspect of the Federal Reserve’s current role, which has rightly come under criticism from many conservatives. To give a simplified overview, the Fed would create NGDP futures contracts and peg them at a price that would rise at 5% per year. If investors expected NGDP growth above 5%, they would buy these contracts from the Fed. This would be an “open market sale,” which would automatically tighten the money supply and raise interest rates. The Fed’s role would be passive, merely offering to buy or sell the contracts at the specified target price, and settling the contracts a year later. Market participants would buy and sell these contracts until they no longer saw profit opportunities, i.e., until the money supply and interest rates adjusted to the point where NGDP was expected by the market to grow at the target rate.
It might be helpful to compare this idea to the old international gold standard. Under that system, the U.S. government agreed to buy and sell unlimited gold at $20.67 per ounce. This kept gold prices stable, and the money supply adjusted automatically. Unfortunately, however, stable gold prices did not always mean a stable macroeconomic environment. Putting NGDP futures contracts on the market along a similar model would likewise create a stable price for those contracts, hence stabilizing expected NGDP growth. And stable NGDP growth would be more conducive to macroeconomic stability than a stable price of gold, especially in a world in which rapidly growing demand from Asia might distort the relative price of gold.
Rather than a repeat of the 1980s gold standard commission — I seriously doubt whether any Team Romney economists think a gold standard is a good idea — better a commission to examine the Federal Reserve and whether its mandate and role need to be modified or updated.
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Oct '10
Re: Romney, the Republicans, and the Gold Standard
Umbra Fractus
What you've described there is actually the greatestweaknessof the gold standard. The strongest argument we have against wealth redistribution is that prosperity is not a zero sum game; it is possible to make the poor richer without making the rich poorer (see Peter's clip of Lady Thatcher somewhere below.)
A gold standard takes that argument away from us. Pegging the currency to a single commodity, as opposed to the economy as a whole which is what we have now, does in fact place a ceiling on the total amount of wealth that can exist in the nation, thus making true the assertion that acquiring wealth must come at someone else's expense. · 1 hour ago
I have never seen a criticism of the gold standard as good as this. Goldbug libertarians need to understand that gold does not lead to greater economic freedom; it leads to less.
Apr '11
Re: Romney, the Republicans, and the Gold Standard
Joseph Eagar
I'm sick of this argument.
Tough!
May '11
Re: Romney, the Republicans, and the Gold Standard
Even aside from the fact that it would be insane for the United States to voluntarily give up the advantage of controlling the world's reserve currency and replacing it with an asset that is disproportionately held by dictatorships, the whole plan just wouldn't work. The world today is just too dependent on credit. If the government won't print fiat money, banks will. You can call them checks or credit cards, but they are no different than dollar bills. The only important part is where the dollar bill says it is “legal tender for all debts public and private.” Fiat money is, in other words, an IOU. Just the same as a credit card purchase. So long as the person who accepts the dollar bill or the credit card as payment believes that the next guy will also accept its value when he tries to spend it, it is money. (I won't even get into what happens to the United States' existing $15 trillion dollar debt, all of which is fiat money - a promise to repay those bonds, if fiat money suddenly became illegal and worthless.)
Jun '12
Re: Romney, the Republicans, and the Gold Standard
Umbra Fractus
A gold standard takes that argument away from us. Pegging the currency to a single commodity, as opposed to the economy as a whole which is what we have now, does in fact place a ceiling on the total amount of wealth that can exist in the nation, thus making true the assertion that acquiring wealth must come at someone else's expense. · 14 hours ago
"Pegging the currency to a single commodity, as opposed to the economy as a whole which is what we have now." Are you sure that's what we have now? Is the dollar really pegged to the whole economy, or is it subject to manipulation from the central banks and politicians?
Also, isn't the natural deflation as new commodities are brought to market essentially the same as increasing the money supply? If the money buys twice as much let's say, isn't that just as good as doubling the money supply so a dollar stays the same?
This is a real question, I'm trying to understand some of this stuff.
Thanks
Jun '12
Re: Romney, the Republicans, and the Gold Standard
Herkybird
Joseph Eagar
I'm sick of this argument.
Tough! · 8 hours ago
I note that you didn't actually oppose any of his statements. Does that mean you agree with what he said?
May '10
Re: Romney, the Republicans, and the Gold Standard
Our fiat system has allowed and encouraged exponential growth in debt, doubling every 8-10 years, well ahead of economic growth.
The only sense I can make from a NGDP target, is that it allows default-lite, or a repayment of the debt in increasingly lower value currency. Kind of tough on the middle class, pensioners and the like but great for big spending government and the financial class.
Thus a 5% NGD target can be met by 4% - 8% inflation + 1% to -3% real growth. This makes sense how? What is supposedly made better?
Gold standard vs fiat is essentially a choice between disciplined money policy or politically (principally but not exclusively) manipulated policy. I choose discipline as I do not believe the other can be made to work in a sustained manner. In fact history shows that the average life span of a fiat currency is somewhere around 40 years - what a surprise that Bretton Woods was 41 years ago and the developed world is drowning in un-repayable debt.
Oct '10
Re: Romney, the Republicans, and the Gold Standard
ConservativeWanderer
Herkybird
Joseph Eagar
I'm sick of this argument.
Tough! · 8 hours ago
I note that you didn't actually oppose any of his statements. Does that mean you agree with what he said? · 8 hours ago
I did disagree, yes. Gold enthusiasts like to claim that money never changed over the millennium, until the invention of paper money. That simply isn't true. Sovereigns were still able to debase their currencies by clipping, mixing in cheaper metals, etc.
My view is that suppressing market forces in currency markets doesn't work. It has been a disaster for almost every nation that has tried it, and the few success stories are usually tiny nations that host international financial hubs. Fixed exchange rates do not work.
Oct '10
Re: Romney, the Republicans, and the Gold Standard
Steve MacDonald: Our fiat system has allowed and encouraged exponential growth in debt, doubling every 8-10 years, well ahead of economic growth.
Thus a 5% NGD target can be met by 4% - 8% inflation + 1% to -3% real growth. This makes sense how? What is supposedly made better?
Gold standard vs fiat is essentially a choice between disciplined money policy or politically (principally but not exclusively) manipulated policy. I choose discipline as I do not believe the other can be made to work in a sustained manner. In fact history shows that the average life span of a fiat currency is somewhere around 40 years - what a surprise that Bretton Woods was 41 years ago and the developed world is drowning in un-repayable debt. · 8 hours ago
You realize the gold standard has never lasted more than 70 years? Sure, it's better than 40, but it's hardly "sustainable" in itself. If society wanted a currency with a fixed rate of growth, a crypto currency like BitCoin would be preferable to something as unpredictable and volatile as precious metals.
Apr '12
Re: Romney, the Republicans, and the Gold Standard
I think I'm investing all my wealth in chocolate coins.
Jun '12
Re: Romney, the Republicans, and the Gold Standard
Joseph Eagar
ConservativeWanderer
Herkybird
Joseph Eagar
I'm sick of this argument.
Tough! · 8 hours ago
I note that you didn't actually oppose any of his statements. Does that mean you agree with what he said? · 8 hours ago
I did disagree, yes. Gold enthusiasts like to claim that money never changed over the millennium, until the invention of paper money. That simply isn't true. Sovereigns were still able to debase their currencies by clipping, mixing in cheaper metals, etc.
My view is that suppressing market forces in currency markets doesn't work. It has been a disaster for almost every nation that has tried it, and the few success stories are usually tiny nations that host international financial hubs. Fixed exchange rates do not work. · 6 hours ago
I was referring to Herkybird's "Tough" comment... he didn't refute any of your arguments, Joseph.
May '10
Re: Romney, the Republicans, and the Gold Standard
A disciplined approach like a Gold standard can be cheated upon - the Romans showed us how to disasterous effect. The very examples of Central authorities doing this show the inherent dangers + I think it is inarguable that a Fiat system makes it much easier and much less transparent.
Look at our present situation. A huge % of our citizens have spent their entire adult lives in an economy where debt growth hugely outpaces economic growth and have seen no downside. Currency/market/asset manipulation has become the accepted norm. The Govt. has been spending $100Billion a month more than it takes in for years. Yet when someone proposes something as simple as a slowing of the rate of spending growth, he/she is accused of heartlessly stealing food from the mouth of babes. This slow rot makes ideas like NGDP actually sound sensible, even though it steals from the very people that Govt. says it wants to help.
At some point the debt bill will come due. We will have to re-set monetary policy in a more disciplined fashion. The pain of this re-set grows every day that we continue the fiscal insanity that has become our accepted norm.
Dec '10
Re: Romney, the Republicans, and the Gold Standard
You seem to be confusing monetary policy with fiscal policy. For a year and a half before the financial crisis of 2008, the Fed had purposely inverted the yield curve and was pursuing an overly tight monetary policy through it's Open Market Operations. The Fed's extremely tight monetary policy was the immediate cause of the financial crisis.
Since the financial meltdown, the Fed has been providing desperately needed liquidity to the economy and the markets. Credit deflation has been one of the most severe and long lingering problems of the financial crisis - credit deflation is a huge inhibitor of economic growth.
Nov '10
Re: Romney, the Republicans, and the Gold Standard
Keith Bruzelius
"Pegging the currency to a single commodity, as opposed to the economy as a whole which is what we have now." Are you sure that's what we have now? Is the dollar really pegged to the whole economy, or is it subject to manipulation from the central banks and politicians?
Yes. The fact that we have a robust economy is the reason we can print and Zimbabwe can't. The idea that fiat currency is based on nothing is silly. Pretty much the entire population of Zimbabwe are multi-trillionaires (or they were before the government just gave up and stopped recognizing their own currency!) but all those zeroes are meaningless because their currency represents one trillionth of an economy smaller than some cities.
The problem in the US is not that we're printing money, but that we're printing faster than the economy is growing.
Nov '10
Re: Romney, the Republicans, and the Gold Standard
Keith Bruzelius
Also, isn't the natural deflation as new commodities are brought to market essentially the same as increasing the money supply? If the money buys twice as much let's say, isn't that just as good as doubling the money supply so a dollar stays the same?
Yes, but it doesn't really address my original point which is that under such a scheme the deflation you describe can only happen if the supply of the specific commodity, in this case gold, increases. As Joseph pointed out, this all but takes growing the economy out of the hands of the private sector.
Edited on August 27, 2012 at 5:47amMay '10
Re: Romney, the Republicans, and the Gold Standard
jetstream - I don't believe I am confused. In our current circumstances, the two are intertwined. We disagree on the cause of the financial crisis. I believe it to be the policy driven degradation of the most secure non Govt. security for the last 100 years - mortgage backed securities (on the back of a real estate bubble) + spectacular bad bets in the unregulated derivative markets.
If the massive and continued injection of liquidity was so absolutely essential, why the tortoise speed money velocity? Reflating the banks by bailing them out and providing outsized profits for them via Fed interest rates may have been justified or not. Making to big to fail banks bigger ditto. It does not seem to have had any positive impact on the economy - outside of a Fed takeover of equity market manipulation (and commodities?).
Dec '10
Re: Romney, the Republicans, and the Gold Standard
The core problem of the financial crisis was Mortgage Backed Derivatives but the immediate cause of the crisis was the Fed's very tight monetary policies in 2007/8. If the Fed had allowed a normalized yield curve and provided adequate liquidity, the MBD's could have been unwound in an orderly manner and the crisis would have been avoided.
The Federal Reserve Boards responsibility is the regulation of the money supply and governance of Federal Banks. Setting interest rates and the regulation of bank reserves is the responsibility of the Fed. Because of the Fed's wrong headed tight monetary policies in 2007/8, the banks and the whole financial system were on the brink of failure. The Fed's actions, too late to prevent the crisis, were needed to prevent a catastrophic failure of the entire financial system.
Velocity is one component of money supply and a low velocity is symptomatic of deflation. If the Fed had withdrawn liquidity or had just been neutral regarding liquidity after the financial meltdown, right now we would be suffering from the monstrous consequences of deflation.
I trade in the markets (including commodities) everyday, the Fed hasn't taken over anything.
Edited on August 28, 2012 at 12:21amApr '11
Re: Romney, the Republicans, and the Gold Standard
This is an impenetrable slug of jargon and specialized knowledge. I don't blame you, but could you please gloss to reveal the cause and effect relationships?
As I understood it, things went like this:
I could go on, but I think that covers the same time frame as your paragraph.
Dec '10
Re: Romney, the Republicans, and the Gold Standard
Grendel, excellent analysis. You clearly understand the issues without my input. To your analysis, I would just emphasize the complexity of the counter-party relationships like credit default swaps. At the time the bubble was bursting, in no small part due to the Fed's excessively tight policies, companies like Bear Stearns and Lehman Brothers were in critical need of capital to remain solvent, but, the capital markets were effectively closed due to the Fed's tight policies. If the Fed had provided the necessary liquidity so Bear Stearns and Lehman could have raised the needed capital which in turn would have given them the time to work through the counter party issues, right now we would be living in a very different world.
Good post!
Edited on August 28, 2012 at 7:57amApr '11
Re: Romney, the Republicans, and the Gold Standard
jetstream:
A-ah! Thanks. That fills in some things I didn't understand in your earlier post. The Fed stopped feeding the bubble. Tighter credit meant lower demand, so supply caught up, and prices started moving down. The places hardest hit were the third-ring suburbs where there had been a lot of (previously uneconomical) new construction. These areas also had a preponderance of subprime loans for inflated prices. The SPLs were the basis of the mortgage-backed securities (thanks, Fred and Fan) that lost value and pulled investment houses' books into the potty.
So what happened with all the CDSs and other derivatives? Four years ago liberals were nattering that GREED--represented by credit default swaps--was going to get us before global warming. Did I miss the papers on the day of Armageddon?