From the conclusion of William Jennings Bryan's "Cross of Gold" speech:
Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold."And he was right - the gold standard is an absolutely terrible economic idea. Yet, as the Atlantic points out (I shamelessly stole the title of this post from an Atlantic blog post by the same name), Ron Paul has managed to convince the world (or at least the Republican Party) that the gold standard leads to stable prices - which has been perhaps the greatest con job of his career.
It's been such a successful con that the Republican Party is even poised to advocate a return to the gold standard as a part of its 2012 party platform. However, even the Financial Times article has trouble spelling out potential benefits of this policy, instead noting only that
The article finds the drawbacks much easier to describe concretely, however:Any commission on a return to the gold standard would have to address a host of theoretical, empirical and practical issues.Inflation has remained under control in recent years, despite claims that expansion of the Fed’s balance sheet would lead to runaway price rises, while gold has been highly volatile. The price of the metal is up by more than 500 per cent in dollar terms over the past decade.
A return to a fixed money supply would also remove the central bank’s ability to offset demand shocks by varying interest rates. That could mean a more volatile economy and higher average unemployment over time.So, the Republican Party is really looking to increase economic volatility and unemployment in order to ... stabilize the price of gold? Does that seem like a smart tradeoff to anyone else?
It is true that a gold standard can lead to stable prices over the long run (as in, from one century to the next), but it doesn't matter to me at all whether prices next century are the same as this century - I, and everyone who is alive right now, will be dead by 2130, so we shouldn't care about long-run price stability. What matters to us much more is short- and medium-term price stability - how does the gold standard fare on that front?
Here's a chart of inflation in the U.S. during the most recent period of time the U.S had a gold standard:
|Source: The Atlantic.|
So, under the gold standard, you could have inflation as high as 24%, and just a few months later, you could see deflation of 16%. Wow, what stable prices!
On the other hand, here's a chart of US inflation during the past few years - years during which the Fed was practicing quantitative easing, which many conservative commentators, politicians, and economists were sure would lead to runaway inflation:
|Source: The Atlantic.|
OMG, would you look at the ... utter lack of runaway inflation or deflation. On the other hand, if you want to see runaway inflation and deflation, perhaps you should take another look at the rates of inflation and deflation under the gold standard in the previous chart.
But why are prices so volatile under the gold standard? I'll explain - let's assume, for the moment, that the price of gold is fixed and immutable over time (note: this is a bad assumption, but it simplifies my explanation, so we'll stick with it for now). If the price of gold is fixed, then the value of your money is also fixed over time and can't change - but we'll assume that no other country is on the gold standard (because it's a dumb idea and they're not ruled by the Republican Party), so their currencies aren't fixed to the value of your currency. You might think this arrangement is a good thing, but it's not. Prices of some things relative to other things change all the time - the prices of oil v. gold, of different foods v. oil or gold, of finished goods like computers v. oil or gold, of services v. oil or gold, etc. But, these products and services aren't just produced and consumed domestically - you can trade food for oil with Saudi Arabia, or food for cars with Japan, etc. If the value of a country's currency is fixed, then relative prices and wages can only adjust between each other and between other countries by increasing or decreasing - but the problem is that both wages and prices are "sticky;" that is, businesses don't like to constantly revise their price lists (because that's expensive), and workers HATE to receive less nominal pay (because it makes them feel like they've lost something). Therefore, every single person in your country experiences a lot of pain under a gold standard system, because both prices and wages have to constantly change, as shown by the first chart above. Furthermore, if you're on a gold standard and other countries aren't, you've put yourself at a competitive disadvantage, because when economic trouble comes, they can devalue their currency, making their goods cheaper than your goods - so they sell more than you and recover, while all you do is increase your holdings of (somewhat cheaper) foreign fiat money, as your consumers buy cheaper goods from abroad.
For an extremely timely case study on what happens to a country in economic trouble under (a monetary regime very similar to) the gold standard, see Greece.
But enough of my poor explanations - what do the experts think? According to a recent poll of leading economists found that exactly zero economists (conservative, liberal, freshwater, saltwater, or other) agreed with the 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."
One might think that the Republican Party would look at the data and experts' opinions and think, "Hey, I guess we were wrong about that whole inflation / gold standard stuff," but no, they look like they're going to double-down on their misguided economic ideology rather than adapt to what reality is showing them.
What baffles me most, however, is that the Republican Party doesn't even seem to feel the need to explain WHY they think returning to the gold standard is a good idea, other than "OMG, gold has gotten expensive." Is it a bigger problem that the price of gold is more volatile, or would it be a bigger problem if the whole economy was more volatile and unemployment was permanently higher?
Then again, I haven't followed the advice of right-wing pundits and sunk all my money into gold - perhaps if I had, I'd be more excited about exchanging permanent economic volatility and higher unemployment for a more stable gold price.
But, for practically everyone in the U.S. (including most businesses), a return to the gold standard would be a personally catastrophic economic event, and it would greatly increase the frequency of destabilizing periods of both higher inflation and grinding deflation, as well as permanently increasing unemployment.
Personally, I question the rationality of any party or person who looks at the above charts and concludes that, for society on the whole, the gold standard will lead to a better outcome than fiat currency.