One of the alleged virtues of the gold standard is that it would eliminate the discretion of politicians and their appointees over the value of money. This would only be true, however, if the United States adopted a gold standard that was somehow irrevocable. A mere law fixing the price of dollars in terms of gold would be subject to repeal and controversy just like any other law.
In the past, sticking with gold required the country to endure long grinding recessions that lasted for years on end. Today, however, we know that fiat money works fine. So whatever concern you have about political manipulation of the money supply would not be addressed by shifting to gold — future leaders could always shift back.
In the grand scheme of things, gold is not an especially useful commodity. But it's not totally useless either. People like gold jewelry, for starters, and gold has some limited industrial applications.
That means forcing banks to hold their reserves in terms of giant piles of physical gold would impose a cost on the real economy. Gold held in bank vaults is gold that is not available for industrial or decorative uses. This isn't a huge deal economically, but it's not nothing either. Fiat money, being totally useless outside the context of a monetary system, is an ideal thing for banks to hold in reserve. The government can always make as much of it as we want. By contrast, clashes between gold-as-money and gold-as-commodity are a drag on the economy and encourage wasteful expenditure of effort on smuggling.
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Reddit Pocket Flipboard Email. It worked for McKinley Universal History Archive Paul Krugman was writing a bit last week about the enduring appeal of economically harmful hard money policies and whether there was some way you could tie to this to the class interests of the super-wealthy. Here are 7 reasons it's a bad idea: 1 A gold standard wouldn't stabilize inflation There is essentially one-to-one overlap between gold standard enthusiasts and people worried about inflation. Next Up In The Latest.
What makes it such an idea non grata? It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have -- which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up.
When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering. Why would anyone want to go back to the bad old days? The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits.
It was a devilish device for turning recessions into depressions. The answer is that some people aren't worried about depressions. Some people are worried about inflation. Even when none exists. To them, these fetters are the feature, not a bug.
It's a simple idea. If governments can't print or spend too much money, prices should be stable. Simple, but wrong. Not exactly an, ahem, golden age of price stability. The gold standard should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead.
Shelton is right to desire a monetary regime that is rules-based and that brings about stability. However, a gold standard is not the only way to achieve those goals. For example, Mercatus Center scholars David Beckworth and Scott Sumner have argued that the Fed should stabilize the growth of total spending in the economy nominal GDP along a predetermined, level path. Since nominal GDP growth is the sum of inflation and real output, the Fed would allow inflation to rise during downturns and help reduce the real value of debt obligations facing consumers and firms.
During expansions, the Fed would allow inflation to fall, so consumers could benefit from lower prices. By stabilizing nominal GDP, the Fed would allow inflation to fluctuate somewhat in the short run but stabilize both employment and inflation over the long run. Moreover, since nominal GDP is a single variable, nominal GDP targeting requires less knowledge and discretion on the part of the Fed than the status quo, where the Fed attempts to target unemployment and inflation separately and in a generally discretionary manner.
Therefore, nominal GDP targeting is one realistic way to do the sort of rules-based monetary policy that gold standard advocates want. Share Share. Submit a Letter to the Editor. More from this author.
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