Robert J. Samuelson
“There is always a well-known solution to every human problem — neat, plausible and wrong.”
— H.L. Mencken, 1920
WASHINGTON: The gold standard is one of these “solutions.” Let the economy turn ugly, and we soon hear that the gold standard can save us from ruin. Rep. Ron Paul of Texas is the gold standard’s loudest champion, and it is probably as a sop to him and his followers that the Republican platform recommends that its revival be studied.
Don’t be fooled: The gold standard isn’t coming back; its return would be a calamity.
Gold is imagined as a magical economic sedative, based on its scarcity. True, there isn’t much gold. According to the World Gold Council, if you took all the gold mined since the beginning of time and formed it into a perfect cube, it would measure 67.7 feet on a side. This would slightly exceed the perimeter of the Washington Monument at its base and stand about one-eighth of its 555-foot height. But just how gold would induce economic confidence and stability is left unsaid.
Historically, gold’s main appeal was to ensure stable money. Because its supply could not be rapidly increased, gold coin of fixed amounts of metal (called “specie,” along with silver coin) would hold value as opposed to paper money that could be printed freely by reckless governments. This was a virtue; unfortunately it came with some vices.
Gold was cumbersome to carry. Its scarcity meant that as economies expanded and needed more cash for everyday business, the money supply often lagged. Too little money sometimes forced prices to decline (“deflation”), hurting debtors who had borrowed in more expensive currency.
Gold’s shortcomings inspired new forms of money — paper bank notes and checks. Under a gold standard, however, banks or governments had to exchange these for gold when asked. This seemed the best of both worlds: a money supply flexible enough to permit economic growth; the discipline of gold rigid enough to prevent high inflation.
It wasn’t. In the late 1800s, many farmers were in revolt against the gold standard, which deflated crop prices and (thereby) magnified the weight of their mortgages. Business cycles and financial panics were frequent; short-term fluctuations in gold supply were one reason. Between 1879 and 1913, U.S. unemployment averaged 6.8 percent compared with 5.9 percent from 1946 to 2003 after gold had been abandoned, reports economist Michael Bordo of Rutgers University.
This happened in the Great Depression of the 1930s. Indeed, scholars — led by economic historians Barry Eichengreen of the University of California at Berkeley and Peter Temin of the Massachusetts Institute of Technology — argue convincingly that the gold standard explains the Depression’s severity. To deter people from demanding gold, governments kept interest rates too high. In theory, this encouraged people to hold bank deposits and securities, which paid interest, rather than gold, which didn’t. In practice, high interest rates aggravated the slump, raising joblessness and bank failures.
Great Britain went off gold in 1931. France left in 1936. President Franklin D. Roosevelt effectively ended the American gold standard in 1933, though there remained a partial substitute. (Individuals and companies could no longer convert dollars to gold, but foreign governments could at $35 per ounce. President Nixon halted this in 1971.)
It’s hard to say what “returning to the gold standard” would mean today. Even true believers cannot think that, in the age of electronic money and plastic cards, we’ll revert to an all gold-coin economy. Any new gold standard would involve metallic backing for money. But how much? As Eichengreen has noted in The National Interest, setting the dollars-to-gold conversion price too high would be inflationary — unleashing a flood tide of money. Setting it too low would restrict the supply of dollars and risk repeating the Depression’s crushing deflation.
The arithmetic would be daunting, writes Julian Jessop of Capital Economics to clients. The United States holds gold reserves of 261 million ounces, the world’s largest. The monetary base — cash in circulation plus banks’ deposits at the Federal Reserve — is nearly $2.7 trillion. Backing all that money with gold would require a gold price of about $10,000 an ounce compared with today’s price of roughly $1,600. This sort of change would rattle global financial markets.
It’s hard to imagine a more sure-fire way of creating uncertainty and destroying confidence. If evidence of an incipient surge of inflation were obvious, gold’s appeal might be somewhat understandable. But there’s no such evidence. In 1980, there was a similar clamor for restoring gold’s old role. A presidential commission was appointed — and recommended against it. History may repeat itself: A new gold standard would be so impractical that it could not overcome its own contradictions.
Samuelson is a Washington Post columnist.