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Why the gold standard is hardly the gold standard

Nov 11, 2015

Why the gold standard is hardly the gold standard

Nov 11, 2015

When someone says gold standard, you might think “the best,” “the most perfect” or “the ultimate!”

When economists say gold standard, they have something very different in mind.

The gold standard is also a system of currency and monetary policy, and it’s one that has popped up a few times in the GOP debates. 

Barry Eichengreen, a professor of economics at UCLA, explains how it works: “If you had $20 in banknotes in your pocket, you could take it to the bank and demand gold in return.” Every dollar is tied to gold, and so is the money supply.

The reason some folks like that idea is because it takes control of the currency away from central bankers at the Federal Reserve.

“Today we have central planning at the Fed, and its chair Janet Yellen and the other PhDs that are running around,” said the Gold Standard Institute’s Keith Weiner, dismissively. He is among those who distrust the ability of the Fed to manage the money supply and the various policy tools it develops.

But the thing that makes the gold standard appealing to people like Weiner and Republican Senator Ted Cruz is the same thing that troubles many economists.  Turning the money supply over to gold reduces the government’s ability to manage the money supply and potentially exposes the economy to risks it would otherwise not face.

“So if you had a big gold discovery in South Africa and there is a lot more gold in the world, that would mean you would be expanding your money supply,” said Ted Truman with the Peterson Institute.  The trouble is that the country may not want to increase the money supply at that time.  

Another example: what if India started buying up gold? The United States would have to raise interest rates to convince people to keep their gold here. That would mean that even if the U.S. economy were in recession, interest rates would rise.

One more problem. “Gold isn’t produced fast enough to keep up with the growth of the economy,” said Richard Sylla, professor of economics at New York University.

In the 19th century, that caused serious deflation. 

All of these are reasons why in some surveys, zero percent of economists think the gold standard is a good idea for the United States.

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