“Re-adopting the gold standard in America,” argues a surprising e21 editorial, “could spur the economic powerhouses of the world to join, creating more stable markets and prosperity across the globe. Let us hope.”
Let us hope what, exactly? “Let us hope” that the gold standard is re-adopted? Unlikely, as even its proponents concede. “Let us hope” that re-adopting the gold standard would produce greater prosperity? Even more unlikely, if that’s possible. A new gold standard would risk deflation and depression.
For instance: imagine, writes economist Scott Sumner, a scenario where soaring Asian demand for gold raises the yellow metal’s purchasing power, “producing deflation in all countries that use gold as the asset in terms of which all prices are quoted.” With prices falling, demand would decline, unemployment would raise, and prices would fall further. At that point, fear of government abandoning the gold standard, Ramesh Ponnuru explains, might prompt gold hoarding, accelerating the deflationary spiral. As Tyler Cowen has put it, “Why put your economy at the mercy of these essentially random forces?”
Consider for a moment a thought experiment wherein the US government unilaterally decides to fix the dollar price of gold at a level that implies lower inflation. Under the rules of the gold standard, that would imply setting the dollar price of gold at a level below the current world market price. But that would not work. At such a level, private gold buyers would purchase their gold from the United States and experience a windfall gain. The US gold stock would fall, and the US money supply would fall as well, given a rigid gold standard rule. That kind of a deflationary shock would be disastrous in the current environment …
There is good reason why in a 2012 University of Chicago business school poll of 40 top economists — academics on the left, center, and right — found not a single one who agreed with this statement: “If the US replaced its discretionary monetary policy regime with a gold standard, defining a “dollar” as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American.” In fact, 66% “strongly disagreed” with the statement vs. 34% who just “disagreed.”
Given the weight of evidence against the wisdom of returning to a gold standard, I would guess that for most people the idea merely reflects ideological nostalgia for the pre-New Deal period. A bridge back to the 19th century. In a review of “Money, Gold, and History,” by Lewis Lehrman, economist David Beckworth offers a path forward:
The supply of money is created mostly by banks and other financial firms. The demand for money is shaped by the needs of households and firms. Both are difficult to measure and individually beyond the direct control of the Federal Reserve. The product of the two, however, can be meaningfully influenced by the central bank. It is called total dollar spending, and its stabilization should be the objective of monetary policy. The Federal Reserve can do this by managing expectations of future total dollar- spending growth.
Here’s how: The Federal Reserve credibly commits to doing whatever it takes to keep total dollar spending growing at a constant rate over time. The public would come to understand that, if total dollar spending went above or below this target growth rate, the Fed would correct it. This belief would become a self-fulfilling expectation, requiring minimal action by the central bank.