Already a Bloomberg.com user?
Sign in with the same account.
About 2,000 words into the Republican Party’s 32,000-word platform there’s a big, deferential shout-out to Ron Paul and his Tea Party torchbearers. The section is titled “Inflation and the Federal Reserve,” and it makes the case for one of the 77-year-old congressman’s biggest policy desires: to return the U.S. to the gold standard by setting a fixed dollar price for an ounce of the metal, using that to determine the value of the currency. The Fed wouldn’t be able to increase the money supply (print more currency) without first buying more gold.
The section begins by raising the bugaboo of inflation, which “diminishes the purchasing power of the dollar at home and abroad and is a hidden tax on the American people.” True statement, and one that would be worth addressing if it were actually happening. The economy has a lot of problems right now, but inflation isn’t one of them. Prices are increasing by a little more than 2 percent a year, which is right in the range the Fed wants. Nonetheless, the GOP platform uses the risk of inflation to make the roundabout case for a return to the gold standard.
You can find any number of economists who think pegging the dollar to the price of gold is a crank idea. Finding one who doesn’t is much harder. In a poll taken by the University of Chicago in January, not a single one of the 40 economists surveyed were in favor of it. Even conservative economists think it’s ridiculous. ”It could do massive damage to the economy,” says John Makin, an economist at the American Enterprise Institute. It would severely restrict the ability of the government to finance any growth (which the Paul crowd might say is the whole point).
The mechanics of switching back to the gold standard are completely crazy. The U.S. would probably have to do a combination of two things: severely shrink the money supply—jacking up interest rates along the way—and go out and buy a whole bunch of gold. Both would be disastrous.
According to the U.S. Treasury, the U.S. holds about 260 million ounces of gold reserves. At $1,655 an ounce, that’s roughly $430 billion of gold. Our money supply, including cash in circulation and bank deposits, is six times that size—more than $2.6 trillion. For those two numbers to match, the price of gold would have to rise to about $10,000 an ounce, says Makin. The U.S. would also have to go on a massive gold-buying spree, raising the price significantly. Assuming it couldn’t get the price to $10,000 an ounce, the Fed would have to make up the difference by shrinking its balance sheet and tightening up the money supply by raising rates. The risk of deflation would be significant at that point.
There’s a reason why not a single major currency remains on the gold standard. Fixing the world’s most important currency (the U.S. dollar) back to the price of gold would be a calamity for an already fragile global economy. Why not just peg the dollar to the price of crude oil? At least the stuff is useful.