Yearning for a return to the gold standard — the monetary system in which paper dollars are backed by, and can be exchanged for, a fixed amount of gold — has been on the rise in the Republican Party. Ron Paul’s long quest for a new gold standard reached new prominence with the latest presidential campaign, and several of his fellow GOP candidates attended events lauding idea. Major GOP politicians have either endorsed a gold standard or stepped up to the edge of doing so, and the idea has popped up in state party platforms. Now The Financial Times reports that the gold standard is on the verge of becoming national Republican policy:
Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for an audit of Federal Reserve monetary policy and a commission to look at restoring the link between the dollar and gold… A commission would have no power except to make recommendations, but Mr Fieler said it would provide a chance to educate politicians and the public about the merits of a return to gold. “We’re not going to go from a standing start to the gold standard,” he said.
In 1981, President Ronald Reagan created a similar commission to look into the gold standard, though it settled on supporting the current monetary system. The Republicans’ 1980 platform blamed inflation on the abandonment of the gold standard, and their 1984 platform said “the gold standard may be a useful mechanism.”
Unfortunately for the GOP, there are huge policy problems with a gold standard. As Fed Chairman Ben Bernanke pointed out, there isn’t enough gold to back the supply of money the economy actually needs. Worse, a gold standard would shackle monetary policy’s ability to respond to economic downturns. Interest rates could not be lowered to combat recessions or high unemployment. Instead, they would be driven by the price fluctuations of the gold supply, regardless of the needs of the broader economy.
The argument for a gold standard doesn’t make sense historically, either. After the Great Depression, there was a very strong correlation between when countries abandoned their gold standards and when their recoveries began. And what followed the complete end of the U.S. gold standard in 1971 was the longest period of low and stable inflation in modern times: