Fool’s Gold?

As the Republican Party mulls a return to the gold standard, American economists are pointing out the pitfalls.

The gold standard is a monetary system where a country’s currency is pegged to a fixed amount of the precious metal. The U.S. abandoned the system decades ago, but this year’s Republican platform contains a promise to establish a “commission to investigate possible ways to set a fixed value for the dollar.” It’s a proposal with few supporters in the world of economics. University of Chicago economist Anil Kashyap explains why.

Why was the gold standard abandoned in the United States?

It’s pretty well understood that the gold standard contributed to some of the problems of the Great Depression. There’s a wonderful book by Barry Eichengreen called Golden Fetters that lays out in excruciating detail how the confusion about how the gold standard worked in the United States meant that the problems in the United States were exported to everyone else because we were contracting our money supply when we should have been expanding it. Our failure to do that meant that other countries had to contract even faster so that their gold wouldn’t be drained out. What this means is that we basically exported some of the deflation that was in the United States to a number of other countries.

After that, people concluded that the existing standard wasn’t that great. Then, after World War II, there was a revised version of the gold standard, but over time countries concluded that the prices at which they pegged their currencies to gold weren’t helping the world’s trade flows and capital flows equilibrate very well. Eventually, in the early ’70s, we concluded that this wasn’t working and abandoned it.

Why is it coming up again now?

It’s not being brought up by any serious economists. It’s important to realize that the people who are advocating this are pretty untrained, and, I think, fairly ignorant about the way financial markets work. I am unaware of any reputable expert that is seriously suggesting this.

I’m not sure I fully understand why politicians seem to be able to score points with this, but I think one reason is just that there’s a lot of frustration with how the financial crisis played out. There’s a general distrust of experts, the Federal Reserve, and central bankers everywhere, so talking about clipping their wings and trying to constrain them is not a surprising reaction.

Ron Paul made the return to the gold standard his one big message, and he did get some votes. It’s the part that he seems to push quite aggressively.

I’d bet a lot of money that Mitt Romney is not actively considering the gold standard. If he does, it will be over the keen objections of his main economic advisers.

Taking into consideration some of the general criticism of the Federal Reserve, and perhaps forcing it to be a bit more forthcoming with what it’s doing … that might well be something that they would look into.

Do you think voters might find this idea appealing?

I doubt it. Not if it’s explained to them properly. Ron Paul seems to think it’s some magical cure-all that doesn’t come with any costs whatsoever. The misleading way in which it has largely been discussed probably makes it sound more appealing than it is.

Is there any chance the United States will return to the gold standard?

If it ever began to gain any traction, you’d have thousands of economists writing op-eds explaining why this is a crazy proposal, but thus far, it’s been so far out in the fringe that nobody has bothered to beat it back.

I run a poll surveying a very wide range of economists – micro-economists, macro-economists, Republicans, Democrats, people who have served in Washington, people who haven’t, people who trained in the ’60s, people who trained in the ’90s – and not one of them thinks the gold standard makes any sense. So when I tell you that it’s completely discredited, there is a tangible piece of evidence to convey this idea. You’d have to call hundreds of economists to find somebody who would endorse going back to the gold standard.

Original Article
Source: the mark news
Author: Anil Kashyap