What Would Happen If We Adopted The Gold Standard?

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THE PLANK FEBRUARY 19, 2008

What Would Happen If We Adopted The Gold Standard?

Thanks largely to Ron Paul, the idea of switching to the gold standard is back in circulation. Even on this website, libertarian Alvaro Vargas Llosa advocated it, complaining that "money was too important to be left to the politicians," and Tucker Carlson credulously speculated that Ron Paul's gold fixation might mean "the Ron Paul movement is more sophisticated than most journalists understand."

But it turns out that switching to the gold standard is a terrible idea. To clear up the issue, I called Professor Jeff Frieden, a monetary expert at Harvard, to find out exactly what would happen if we made the switch.

  • The United States would be unable to respond quickly and effectively to sudden economic shocks. Recessions would be deeper and longer, and the economy would be biased towards deflationary spirals. Witness the fact that the United States, which remained on the gold standard till 1933, had a much longer and deeper recession than Britain, which had gone off gold in 1931.

Milton Freidman himself (often cited as the supreme authority by gold-standard bearers) warned about just this problem in his magnum opus, Monetary History of the United States, 1867-1960, instead advocating a steadily-expanding supply of paper money.

  • It would increase government regulation of the economy. With no Fed, inexpert Congress will bear the onus of alleviating economic suffering. With deeper, longer recessions, Congressmen will inevitably succumb to pressure for more spending and regulation of the economy--as they did during the Great Depression.

Indeed, Fed management of the money supply was originally meant to stave off calls for socialism by rendering free-market capitalism more resilient, flexible, and humane. Switching back to gold would breathe new life into anti-capitalist politics.

  • It would increase our reliance on foreign credit and ship yet more jobs overseas. Ron Paul says "our economy and our very independence as a nation is increasingly in the hands of foreign governments such as China and Saudi Arabia." But adopting the gold standard would actually exacerbate this problem, not alleviate it.

Assuming we're not in a recession, economic growth would then continually cause deflation, making domestically-produced products more expensive and foreign imports cheaper--increasing consumption of imports. The trade deficit would continue to balloon at the expense of American jobs.

  • Insofar as it helps anybody, the gold standard would favor Wall Street bankers over entrepreneurs, businesses, and workers. Ron Paul likes to rail against Wall Street, complaining that our money is being "inflated at the behest of big government and big banks," who cause "[y]our income and savings [to] lose their value."

But banks, being creditors, benefit from deflation, not inflation--since inflation makes it easier for debtors to pay back their loans at lower prices. Credit card bills and business loans would become more expensive, increasing everybody's debt except the banks'.

One of the great ironies of Ron Paul's campaign is that it was the inflexibility of the gold standard during the 1890s spawned the anti-Washington Populist movement, led by William Jennings Bryan (read his eloquent attack on the gold standard here).
 
Now, Ron Paul leads a movement with similar populist tendencies. But--perversely--he's on a crusade to resurrect a great symbol of Wall Street-Washington dominance over the individual.
 
Not only would the gold standard have disastrous effects for the U.S. economy, it would undermine liberty, increase debt, and weaken the country. Somewhere, Alexander Hamilton's ghost is cracking a smile.
 
--Barron YoungSmith

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posted in: the plank, business, social issues, technology, united states, person career, wall street, alvaro vargas llosa, jeff frieden, milton freidman, ron paul, tucker carlson, harvard, professor

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