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.

There are 38 comments.

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  1. Profile Photo Member
    @JosephEagar

    I’ll repost a comment from another post here:

    I don’t understand why libertarians think a Fed-less world would lead to more economic freedom.  The gold standard required massive government intervention to work.  Traditional Keynesian approaches to macroeconomic stability were designed for fixed regimes, which is why Milton Friedman favored flexible rates.

    Under fixed exchange rates, the U.S. had capital controls, tariffs, a hyper-regulated banking sector, and a political culture that micromanaged demand with fiscal policy.  Post-floating, we have no capital controls, fewer tariffs, a much less regulated economy, and a technocratic culture that manages demand with monetary policy.

    • #1
  2. Profile Photo Inactive
    @ShawnB

    Gold is as much a fiat currency as paper money.  Gold only has intrinsic value in manufacturing where it is often consumed in the process.  Otherwise gold is valuable because we think it is pretty and use it in jewelry.  This is silliness.  This is why Ron Paul and his followers need help.

    • #2
  3. Profile Photo Member
    @BrianClendinen

    If you are going to quote Mitlon Friedman on a piece about the Fed and ideas on how to set the money supply. You should talk about his idea that the Fed should be run by a computer and the Boards only job should be to perodicly (at most once a year) review the model and adjust it if needed.

     

    That is the most sane proposition  for the Fed I have ever heard to minimize  political influence and tinkering.

    • #3
  4. Profile Photo Inactive
    @FredCole
    ShawnB:  This is why Ron Paul and his followers need help. · 6 minutes ago

    “Need help” as in…?  Psychiatric help?

    • #4
  5. Profile Photo Inactive
    @Herkybird
    ShawnB: Gold is as much a fiat currency as paper money.  Gold only has intrinsic value in manufacturing where it is often consumed in the process.  Otherwise gold is valuable because we think it is pretty and use it in jewelry.  This is silliness.  This is why Ron Paul and his followers need help. 

    While I understand what you’re saying, it is still a fact that gold, throughout the ages, has been seen a not only as a pretty bauble, but also as a store of value in an uncertain world.  This was true of the Roman gold-solidus, and the Byzantine Bezant; specie that once played the same reserve-currency role as the dollar today or Sterling a century ago.

    While I’m not sure exactly how you’d link the kind of economic growth  we’ve grown used to a money supply based on mining and not printing, fiat-based currencies controlled by politicians have become a universal plague on mankind.  And while a gold standard does tend to have a deflationary bias, at some point we have to unwind the excesses of the past two generations and reset a more sensible value to the dollar.

    • #5
  6. Profile Photo Inactive
    @Todd

    A real free market system for money would not involve any definitive standard.  In other words, the government would not decide on a standard, the market would. Whether that’s gold, silver, Bank of America notes, Wal Mart money, etc.

    Imagine if gold and silver was the money of choice, but then all of a sudden someone figured out how to create gold through some kind of alchemy so that  gold was no long scarce, gold would fall out of favor and the market would need to find a suitable substitute.

    • #6
  7. Profile Photo Member
    @
    Todd: A real free market system for money would not involve any definitive standard.  In other words, the government would not decide on a standard, the market would. Whether that’s gold, silver, Bank of America notes, Wal Mart money, etc.

    Imagine if gold and silver was the money of choice, but then all of a sudden someone figured out how to create gold through some kind of alchemy so that  gold was no long scarce, gold would fall out of favor and the market would need to find a suitable substitute. · 25 minutes ago

    But paper already has alchemy called the printing press (via central banking).

    • #7
  8. Profile Photo Member
    @BereketKelile

    I can guarantee right now that going back to the gold standard will be a failure because it only works when everyone is on it. In the 1930s, once the first country abandoned the gold standard (UK?) it was only a matter of time before everyone else did too. 

    Whether there was greater stability under the gold standard is debateable. In the period between the Civil War and WWI there were at least a dozen banking crises and multiple depressions, one in the 1890s worse than the Great Depression in terms of the severity. 

    The economy’s problem right now is a lack of demand, not inflation. It hasn’t been a problem for almost 30 years. If you were to go back to a gold standard it would require a significant decline in the money supply that would have catastrophic consequences.

    • #8
  9. Profile Photo Member
    @
    bereket kelile: I can guarantee right now that going back to the gold standard will be a failure because it only works when everyone is on it. In the 1930s, once the first country abandoned the gold standard (UK?) it was only a matter of time before everyone else did too. 

    Whether there was greater stability under the gold standard is debateable. In the period between the Civil War and WWI there were at least a dozen banking crises and multiple depressions, one in the 1890s worse than the Great Depression in terms of the severity. 

    The economy’s problem right now is a lack of demand, not inflation. It hasn’t been a problem for almost 30 years. If you were to go back to a gold standard it would require a significant decline in the money supply that would have catastrophic consequences. · 1 minute ago

    We need a period of creative destruction to correct the mal-investments in the economy. Unfortunately more inflation will destroy the savings needed for capital formation. Let losers fail.

    I can say that a return to the gold standard will destroy all nonessential portions of the FIRE (Finance, Insurance & Real Estate) Economy.

    • #9
  10. Profile Photo Inactive
    @Herkybird
    Joseph Eagar

    I’m sick of this argument.  

    Tough!

    • #10
  11. Profile Photo Member
    @Larry3435

    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.)

    • #11
  12. Profile Photo Member
    @BereketKelile
    Aelreth

    We need a period of creative destruction to correct the mal-investments in the economy. Unfortunately more inflation will destroy the savings needed for capital formation. Let losers fail.

    I can say that a return to the gold standard will destroy all nonessential portions of the FIRE (Finance, Insurance & Real Estate) Economy. 

    Unfortunately you do not get to pick the consequences. Most of the damage done will be to investment that is good for the economy and to people all over the country. Any economic growth is going to be accompanied by inflation. But not all inflation is the kind that reduces the standard of living. 

    • #12
  13. Profile Photo Inactive
    @user_83937

    Inflation is already here.  Prices are only rising modestly because the world is flat on it’s back.

    We have almost $16 trillion in debt’ those “responsible” will try to make that number less daunting, by making our dollars worth less.  We are about to destroy any savings anybody has left.

    I can get almost $4/pound for brass, scrapping boat parts, and get paid to scrap the boats.  That’s more than a rancher can get for ribeye steaks.

    Gold doesn’t interest me and it is overvalued.

    Platinum is probably the most useful thing I see out there, but not something I run across.  For now, today, the only economic means I have found of converting natural gas into methanol, a much more storeable fuel, requires a platinum catalyst.  That’s unfortunate and clunky, but the research is not there yet to take the world’s vast  natural gas reserves and make them into a more portable fuel, absent platinum.

    We will devalue our currency.  Meanwhile, from Isarel to North Dakota, the world will be looking for a better means of making natural gas more transportable and compressing it into CNG won’t sell.

    (continued)

    • #13
  14. Profile Photo Member
    @BereketKelile
    CJRun: Inflation is already here.  Prices are only rising modestly because the world is flat on it’s back.

    This is a bit confusing. Unless you’re talking about inflation below the target rate of the Fed (which is what we have now) then inflation means there will be price increases that is more than modest. I think the confusion about inflation is that economists and the public are referring to two different things when they talk about inflation.  

    • #14
  15. Profile Photo Inactive
    @user_83937

    I don’t see our government not gradually eroding dollars, therefore savings, to eke out survival past this debt obligation.  It’s musical chairs; whom will be left holding those devalued dollars?

    Meanwhile, what can the rest of us do, as sentient beings?  We must have energy.  It must be transportable, so trucks and trains and cars can roll down the road.  Compressing natural gas with pumps is very expensive and not very efficient.  Converting natural gas to methanol is very expensive, but pretty efficient.  And we have a world of natural gas, especially after Taco Night.

    Forget the peg for the U.S. dollar to a metal.  Peg our future to an idea, the conversion of an abundant resource, to an idea.  Let’s be the best at making natural gas into a portable fuel, then stay ahead of everybody else.

    We can do it and we don’t have to care what other nations are doing.

    I have been pushing compressed natural gas (CNG), since the 1980s and I have always been wrong.  We can maybe do this with methanol.

    For now, this will require platinum catalysts.

    Sorry to rant, but I think this is important.

    • #15
  16. Profile Photo Inactive
    @user_83937

    I’m sorry bereket, but I really must run.  I am already in trouble.  Here’s my suggestion: wlak through a grocery store and please notice the difference between the inside aisles, and the outside aisles.

    Grocery stores do everything they can to keep prices moderated in produce and meats, but they have to dramatically increase prices on hot sauce and cleaning supplies, to keep the prices down, at the register.  Go look.

    As a society, we purposely except grocery and fuel prices out of our inflation calculations, because they are too “volatile”.  That insulates inflation from the voters and maximizes it to folks like manufacturers.

    For example, if I am able to sell scrap brass for $4 a pound, how do you think that is really impacting manufacturers?  In the past four years, that means that manufacturers have not only seen a doubling in fuel costs, they have seen a doubling in raw material costs that are held at arm’s length, away form consumers.

    Manufacturers cannot just double the prices of their products.  There is a built-up inflation that must, eventually, hit this flat market.

    • #16
  17. Profile Photo Member
    @BereketKelile

    No problem. There’s a little more to inflation than the prices in the grocery store. 

    • #17
  18. Profile Photo Inactive
    @UmbraFractus
    anonymous: The value of a true gold standard is simply that the monetary base cannot be increased at the whim of politicians, but rather only by mining gold out of the ground, which providentially increases the above-ground supply by about 1.5% per year, or just about the rate of human population growth.

    What you’ve described there is actually the greatest weakness of 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.

    • #18
  19. Profile Photo Member
    @Arahant
    bereket kelile: If you were to go back to a gold standard it would require a significant decline in the money supply that would have catastrophic consequences. · 5 hours ago

    Wouldn’t that depend on how many dollars an ounce of gold was pegged to?  For over a hundred years, it was twenty dollars and some change to the ounce.  If we did that, one might as well say, “What money supply?”  But why would it limit it so much were we to peg it higher, closer to current market prices? 

    I’m not a gold bug.  I’d just like to hear more about why some folks think it wouldn’t work.  In studying history, it has typically worked well until the government starts counterfeiting by putting less precious metal in coins of a given denomination.  Until then, it works pretty well.  That’s not to say that there aren’t problems, just that they are different problems and seem to be less severe.

    • #19
  20. Profile Photo Inactive
    @LowcountryJoe
    ShawnB: Gold is as much a fiat currency as paper money.  Gold only has intrinsic value in manufacturing where it is often consumed in the process.  Otherwise gold is valuable because we think it is pretty and use it in jewelry.  This is silliness.  This is why Ron Paul and his followers need help. · 8 hours ago

    Yes!  The gold bugs  have it very wrong and you are 100% correct: gold is every bit the fiat currency paper money is.  Hal Varian nails the concept of ‘money’ in this piece.

    • #20
  21. Profile Photo Member
    @JosephEagar
    Herkybird

    While I understand what you’re saying, it is still a fact that gold, throughout the ages, has been seen a not only as a pretty bauble, but also as a store of value in an uncertain world.  This was true of the Roman gold-solidus, and the Byzantine Bezant; specie that once played the same reserve-currency role as the dollar today or Sterling a century ago.

    While I’m not sure exactly how you’d link the kind of economic growth  we’ve grown used to a money supply based on mining and not printing, fiat-based currencies controlled by politicians have become a universal plague on mankind.  And while a gold standard does tend to have a deflationary bias, at some point we have to unwind the excesses of the past two generations and reset a more sensible value to the dollar. · 8 hours ago

    Edited 4 hours ago

    I’m sick of this argument.  Sovereigns debased their currency all the time pre-paper money.  Gold was not a stable unit of value; far from it.  There is no evidence that gold operated as an unchanged monetary standard for thousands of years.

    • #21
  22. Profile Photo Member
    @JosephEagar
    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.

    • #22
  23. Profile Photo Inactive
    @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?

    • #23
  24. Profile Photo Member
    @Arahant

    I think I’m investing all my wealth in chocolate coins.

    • #24
  25. Profile Photo Inactive
    @SteveMacDonald

    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.

    • #25
  26. Profile Photo Inactive
    @ConservativeWanderer
    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.

    • #26
  27. Profile Photo Member
    @JosephEagar
    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.

    • #27
  28. Profile Photo Member
    @JosephEagar
    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.

    • #28
  29. Profile Photo Inactive
    @Keith
    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

    • #29
  30. Profile Photo Inactive
    @SteveMacDonald

    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. 

    • #30
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