Rep. Mike Pence (R-IN), a top House Republican and possible 2012 presidential contender, gave a speech at the Detroit Economic Club this afternoon outlining his “prescription for a fresh start for the American economy.” The Detroit Economic Club is a “popular venue for candidates testing the presidential campaign waters,” and Pence is “working hard to cultivate support among the fiscal conservatives that are driving the tea party.”
PENCE: Before I move on, I’d like to note, in the midst of all that’s happened recently — massive borrowing and spending, QE2 — a debate has started anew over an anchor to our global monetary system. My dear friend, the late Jack Kemp, probably would have urged me to adopt the gold standard, right here and now in Detroit. Robert Zoellick, the president of the World Bank, encouraged that we rethink the international currency system including the role of gold, and I agree. I think the time has come to have a debate over gold, and the proper role it should play in our nations monetary affairs. A pro-growth agenda begins with sound monetary policy.
Currently, the global financial system does not assign any value to gold, and the U.S. Federal Reserve is not required to tie the value of the dollar to anything. A return to the gold standard, which would tie the value of the U.S. dollar to the value of gold, is a fringe economic position that could lead to a drastic reduction in prices. “Very few economists think this would be a good idea,” Paul Krugman has noted. It would prohibit the government from adjusting interest rates, which it often does based on the health of the economy — instead everything would be tied to the value of gold.
The U.S. abandoned this policy in 1971, and as Krugman notes: “Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else — deflation on a scale not seen since the Depression. This doesn’t sound like a particularly good idea.”
Moreover, as Matthew Yglesias has observed, the idea of the enforcing a gold standard doesn’t exactly fit into the Tea Party’s free-market ethos. As none other than Milton Friedman wrote: “I think those people who say they believe in a gold standard are fundamentally being very anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.”
Returning to the gold standard wasn’t the only far-right economic proposal Pence offered in his speech. The Huffington Post’s Amanda Terkel details Pence’s call for the elimination of the U.S. tax code in favor of a “flat tax.”
CAP economist Adam Hersh explains further why the gold standard would be extremely unwise: “Gold makes for a maddeningly inconvenient means of exchange. Try making change for a bar of gold. Gold as money would severely raise the costs of transacting for goods and services, and that is bad for the economy. Paper money tied to gold side-steps this problem to an extent, however the volatility of gold prices makes unpredictable just how much gold-backed paper currency one would need to carry around to conduct daily transactions. Consider U.S. international trade accounts. In 2009 we had a trade deficit of $375 billion. If gold were our money (or our foundation for paper money), we would have to ship about 8500 tons of gold overseas.”