We've recently heard somewhat of a resurgence of the gold standard debate, both from libertarian politicians such as Ron Paul and from the more mainstream Republican party. (It's a bit unclear, however, how committed Republicans are to this issue versus how much they are just throwing Dr. Paul a bone.) Because of this, it's worth investigating what academic economists have to say on this issue.
In general, mainstream academic economists don't think that a gold standard would improve price stability and employment outcomes. In addition, Bruce Bartlett explained earlier this month that the gold standard question had been revisited during the Reagan administration and had been deemed an unappealing proposition. By my calculations, the cycle for history repeating itself has a length of about 32 years.
Comments
Of course economists who support the gold standard do so precisely because they oppose price stability. It amazes me how few mainstream economists understand this.
With a gold standard there would tend to be a general fall in prices as the production of goods and services outstrips the production of gold. Consider the tech industry where prices fall on a regular basis. This is because the production of tech goods outstrips the production of money causing prices to fall. Yet despite the fall in prices there is no depression in the tech industry. On the contrary, firms are increasingly profitable because they sell more. The same would be true of the wider economy on a gold standard.
In fact attempts to counter the tendency of falling prices in times of economic growth by increasing the money supply in an attempt to achieve “price stability” is precisely the policy that gold standard advocates wish to avoid. All increases in the money supply end up driving interest rates artificially low, which gold standard advocates believe causes an economic bubble (such as the housing bubble we just experienced).
The fact that the gold standard would not produce “price stability” is seen as a virtue by gold standard economists, not a vice.
I’m not sure that — after a century of the Federal Reserve and a loss of 95% of the purchasing power of the dollar — a lack of “price stability” can be chalked up as a flaw in the gold standard, or any precious metal standard.
Or was that post intended to be humorous?
Recently I saw a photo (or Photoshop) of a sign offering gasoline for a price more typical of the 1950s or ’60s than today — with the final line being “If paid for with pre-1964 silver US coins”.
Looks like there’s more price stability in precious metal coins than in the dollar.
Personally, I think we’d be better off if people could choose whatever currency (or non-currency, for that matter) was agreeable to the parties to the transaction, with no currency having an preferred place before the law.
If those who want to use gold, or goats, or some other country’s currency or US dollars, why is it anyone else’s business what they use?