Against the Gold Standard

On Twitter, for the most part, the only people who talk about the gold standard are those who are in favor of it. In addition to those who mention the gold standard explicitly, anyone who says that the free market should be setting the interest rate even in the short run, with no intervention of a central bank, have to be either talking about a commodity money system—I think. I think a commodity money system would be a huge mistake, but like the sound of “the free market setting rates.” So I would be very interested in hearing about any scheme to have the free market set interest rates even in the short run that did not involve a commodity money system. (Note that cryptocurrency does not avoid having a central bank. The bitcoin algorithm is, in effect, a central bank for bitcoin. Bitcoin has a robot central bank.)

I have been a foe of the gold standard most of my life: ever since I had any opinion on the gold standard at all. The basic problem with the gold standard is the problem of instruments and targets. With the interest rate and money supply combined, we can target one thing. Should that one thing really be the price of gold? Wouldn’t we rather have it be the price of the basket of commodities in the consumer price index, say? And with price adjustment being so slow, do we really want to totally dismiss the idea of keeping output and employment at the natural level? And given the (approximately true) “Divine Coincidence” that keeping output and employment at the natural level keeps inflation steady at any chosen inflation rate, wouldn’t we want to have output and employment at the natural level and inflation equal to zero—absolute price stability? You can’t have absolute price stability and have a gold standard! The price of gold will always fluctuate relative to the basket of goods for the consumer price index.

Many supporters of the gold standard believe that central banks are inherently inflationary. That is certainly true for some central banks, but a large number of central banks now have anti-inflationary attitudes written deep into their DNA. In her July 28, 2019 Politico article “Trump Fed pick’s push for gold troubles lawmakers,” Victoria Guida says it well:

While even [Donald Trump’s intended Fed nominee Judy] Shelton agrees that the U.S. is nowhere near being on track to returning to a gold standard, which was fully abandoned by President Richard Nixon in 1971, the idea has maintained popularity in certain conservative and libertarian circles as a way to increase the dollar’s stability.

That's particularly true among those with a strong distrust of the Fed — a camp that includes Shelton.

While both the 2012 and 2016 Republican Party platforms called for a new commission to consider fixing the dollar’s value to a precious metal, most economists argue that returning to gold would prevent the central bank from acting in the best interest of the economy. They also say it would attempt to aggressively head off a problem that hasn’t existed for decades: runaway inflation.

Obsessing about a supposed strong inflationary bias on the part of major central banks is fighting monetary policy’s last war: defeating the Great Inflation of the 1970s. The current monetary policy war we are in is a war against the threat of deflation or a recurrence of the Great Recession. And there are many other future battles to fight in monetary policy, including getting a monetary policy framework that can make it safe to have zero inflation instead of 2%-4% per year. (See “The Costs and Benefits of Repealing the Zero Lower Bound...and Then Lowering the Long-Run Inflation Target” and “Next Generation Monetary Policy.”)

Quotations from interviews and other reporting Victoria does in “Trump Fed pick’s push for gold troubles lawmakers” are worth repeating:

  • The gold standard would probably shatter a lot of people’s dreams around the world right now. … There was a reason to get off of it.” —Senator Richard Shelby (R-Ala.), a key member of the Banking Committee

  • Support for tying the dollar to gold's value makes a Fed candidate “manifestly unqualified, in the same way I wouldn’t have a surgeon general who supported leeches and bloodletting,” said Jason Furman, a Harvard professor and former chief economist to President Barack Obama. “It handcuffs the Fed and locks them into focusing on an objective that has no underlying reality, which is the price of the dollar relative to gold.”

  • “I don’t think it’s relevant,” Sen. Tim Scott (R-S.C.) said when asked about her views on gold, adding that there was no need to focus on “controversial statements” [that Judy Shelton made about the gold standard]

  • George Selgin, an economist at Cato, is sympathetic to the goals of gold standard supporters but doesn’t agree with their solution.

  • In 2012, the University of Chicago’s Booth School of Business asked 40 prominent economists whether a return to the gold standard would be better for the average American. All of them said no.

Once upon a time, a commodity standard for money was better than what preceded it. That time is long past. Today, the gold standard is a bad idea that deserves its place in history—not a place in the present. Back in the 1930s, weakening the gold standard was the most important economic policy move Franklin Delano Roosevelt did in order to get the United States out of the Great Depression. By handcuffing monetary policy, the gold standard was a bad idea during the Great Depression, and would be a bad idea now, likely to bring a return to a new depression if not quickly abandoned.

Other links about the gold standard:

Did the Gold Standard Help Bring Hitler to Power? (Twitter Round Table)

Matthew O'Brien versus the Gold Standard

Stephen Cechetti and Kermit Schoenholtz: Why a Gold Standard is Bad

Alexander Trentin and Sandro Rosa Interview Miles Kimball: Clinging to Paper Money is Like Clinging to Gold

Additional links about “gold”:

Tim Harford: It’s Tough Turning Ideas into Gold

xkcd Webcomic on the Pot of Gold at the End of the Rainbow 

Gold, Electronic Money, and the Determinants of the Prices of Storable Commodities from the Ground

Links about cryptocurrency:

Governments Can and Should Beat Bitcoin at Its Own Game

Danny Vinik's Interview with Miles Kimball for Business Insider: There’s an Electronic Currency that Could Save the Economy—and It’s Not Bitcoin

Negative Interest Rates and When Robots Will Set Monetary Policy: George Samman Interviews Miles Kimball

What Bitcoin Tells Us about Electronic Money

Susan Athey on Bitcoin as a Medium of Exchange

Cryptocurrencies: Is the Dollar Doomed? Video of a Discussion Between Miles Kimball, Justin Wolfers and Matt Yglesias on Electronic Money

Cryptocurrency Conference Tweets

Diego Espinosa and Miles Kimball on Bitcoin and Electronic Money

The Most Exciting Thing About Bitcoin Isn't Bitcoin

Izabella Kaminska's Latest Critique of Bitcoin: "The Hubble Bubble Theory of the Continuous Expansion of the Financial Universe"