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The GOP has picked the wrong time to rediscover gold
Posted by Ezra Klein on August 24, 2012 at 12:26 pm
In 1981, President Ronald Reagan created the Gold Commission. The purpose of the commission was to appease conservatives who wanted to see the country return to the gold standard. The conclusion of the Commission? That’s a clown idea, bro.
Gold is great. But you wouldn’t want to base your currency on it. (Reuters)
“Restoring a gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation,” the Commission reported. They even rejected the halfway measure of issuing a limited number of bonds backed by gold as a way of “introducing gold into our monetary system.”
So, to recap, in 1981, amidst a serious inflation problem, Reagan created a commission to study a gold standard. You couldn’t have picked a more sympathetic president, or a more sympathetic moment, to the gold standard. And they still rejected it.
Now fast forward 30 years. There’s no inflation problem. The head of the Federal Reserve was originally appointed by George W. Bush and is credited by most observers as having headed off a potential Great Depression through creative monetary policy. And so what does the Republican Party want to do? Well, according to a draft of the party’s platform, they want another Gold Commission.
You might dismiss this as a meaningless capitulation to Ron Paul’s delegates. But that’s not what Rep. Marsha Blackburn, co-chair of the GOP’s platform committee, says. “These were adopted because they are things that Republicans agree on,” Blackburn told the Financial Times. “The House recently passed a bill on this, and this is something that we think needs to be done.”
One of those House Republicans is Paul Ryan. To my knowledge, Ryan has not, in fact, endorsed a gold standard. He’s too smart for that. Instead, he endorsed something that sounds better than a gold standard but is functionally identical. “The best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy,” he wrote in the Wall Street Journal.
A moment of explanation: A “gold standard” means that the dollar is backed by gold. The problems with the gold standard are legion, but the most obvious is that our currency fluctuates with the global price of gold as opposed to the needs of our economy.
Pegging the dollar to a basket of commodities works the exact same way. Now the currency fluctuates alongside gold, soybeans, oil, and whatever else we choose to put in the basket. And, like with a gold standard, those commodities don’t follow the needs of the American economy. As Slate’s Matt Yglesias writes, “it means that if a drought devastates the corn crop or a war disrupts Persian Gulf oil supplies, we automatically respond with tight money and a demand-induced recession. Alternatively, if someone discovers a cheap pollution free method of generating unlimited electricity we’d end up with a ton of inflation.”
But it’s not just that a gold or commodity-based standard doesn’t make long-term sense. It’s that it’s a violation of everything the last few years should have taught us. In 1981, the country really was facing an inflation problem. It made sense that people would be looking for radical alternatives that would help control inflation.
Today, inflation is about as low as it’s ever been, and if you look at market expectations — you do believe in the market, don’t you? — it’s expected to stay low. Moreover, we’ve just come through a financial crisis in which the entire global economy might well have collapsed if the Federal Reserve hadn’t stepped in as the lender of last resort after the credit markets froze. We’ve been watching as the euro zone dissolves amidst fears that the European Central Bank won’t act as a lender of last resort.
But as economist Barry Eichengreen writes, a gold standard would mean ”the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster.”
Unlike 1981, in other words, when the gold standard made a kind of superficial sense as a response to our problems, 2012 is a moment when a gold standard would clearly have worsened our problems. Dramatically. As Eichengreen concludes, the idea’s “proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.”
