During the Republican presidential primary debate Tuesday night, Texas Sen. Ted Cruz called for returning the United States to the gold standard. The loud sound heard across the nation immediately afterward came as thousands of economists and monetary policy experts simultaneously slapped palms to faces in disbelief.
The gold standard requires U.S. dollars to be backed by a fixed amount of actual gold held by the government and redeemable on request by anyone in possession of paper currency. The U.S. abandoned the gold standard in practice in 1933 and by law in 1976, in favor of what is known as fiat money. The dollar bills in circulation today are worth something not because they can be redeemed for gold but by law which declares them “legal tender.”
Economists are almost universal in the belief that a return to the gold standard would be absolutely disastrous for the United States economy.
“It’s basically seen as nuts, and I think even most conservative economists would say that,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “We learned the hard way that the gold standard does not bring financial stability. We learned that it’s really bad to have a money supply that’s restricted to the amount of gold you can mine.”
“There are two fundamental problems with a gold standard or any kind of commodity standard,” said economist Bert Ely of Ely & Co. in Alexandria, VA. “One, the standard is a price-fixing mechanism that requires taxpayer-backing. Two, the supply of gold or whatever commodity is used as the standard, relative to demand for that commodity, will vary over time, which is why such standards eventually fail, after a bout of inflation or deflation.”
The gold standard? Seriously?
There are some big name economists who have expressed support for the gold standard. Most prominent among them, former Federal Reserve Board Chair Alan Greenspan wrote a sympathetic paper in 1966 defending it and continued to defend it, a bit more cautiously, as Fed chair.
But at the Fed, the times have clearly changed. Former chairman Ben Bernanke, in multiple forums, has dismissed the idea of a return to the gold standard. In 2012, he explained that limiting the central bank’s ability to adjust currency levels to arbitrary amounts of gold in the Treasury, “means swearing that no matter how bad unemployment gets you are not going to do anything about it.”
However, Sen. Cruz is far from alone in his desire to take the country back to the gold standard. In the same debate last night, Kentucky Sen. Rand Paul warned, despite all evidence to the contrary, that the Fed has in recent years “destroyed” the value of the dollar.
“As the Federal Reserve destroys the value of the currency, what you’re finding is that, if you’re poor, if you make $20,000 a year and you have three or four kids, and you’re trying to get by, as your prices rise or as the value of the dollar shrinks, these are the people that are hurt the worst.”
He didn’t take it as far as Cruz, but the complaint he outlined are generally a prelude to a call for a return to the gold standard, which would deprive the Fed of the ability to increase the money supply when policymakers feel it is necessary.
On Capitol Hill, the new chairman of the House Ways and Means Committee, Rep. Kevin Brady of Texas, is a longtime advocate of returning to the gold standard and has sponsored the Sound Dollar Act, which would limit the ability of the Fed to exercise discretion in monetary policy and would remove the central bank’s mandate to pursue policies that lead to full employment.
However, if the overwhelming majority of economists believe that returning to the gold standard is a horrible idea – and they do – why would lawmakers like Cruz, Paul, and Brady continue to pursue it?
Wessel, of the Hutchins Center, has a theory.
“I think there’s always been this strain in American politics that somehow we don’t trust the government,” he said. “And it is true, if you have paper money and the supply of the money is controlled by an entity like the Fed, you have to trust the Fed to do the right thing.”
The desire to put more limits on the Fed’s authority, he suggests, is “a manifestation of that distrust in government.”