Why the Gold Standard Is the World’s Worst Economic Idea, in 2 Charts
The greatest trick Ron Paul ever pulled was convincing the world that the gold standard leads to stable prices.
Well, maybe not the world. Just the Republican Party. After a 32-year hiatus, the party’s official platform will include a plank calling for a commission to look at the possible return of the gold standard. There might be worse ideas than this, but they generally involve jumping off the Brooklyn Bridge because everybody else is doing it.
Economics is often a contentious subject, but economists agree about the gold standard — it is a barbarous relic that belongs in the dustbin of history. As University of Chicago professor Richard Thaler points out, exactly zero economists endorsed the idea in a recent poll. What makes it such an idea non grata? It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have — which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up. When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It’s no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.
Why would anyone want to go back to the bad old days? The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits. It was a devilish device for turning recessions into depressions. The answer is that some people aren’t worried about depressions. Some people are worried about inflation. Even when none exists. To them, these fetters are the feature, not a bug.
It’s a simple idea. If governments can’t print or spend too much money, prices should be stable. Simple, but wrong. Consider the chart below, which shows headline CPI inflation under the gold standard from June 1919 to March 1933*. Not exactly an, ahem, golden age of price stability.