Republican Party to study gold standard, a bad idea
I assume that there is a good chance that this commission will bury this proposal, but here is the proposal.
The gold standard has returned to mainstream U.S. politics for the first time in 30 years, with a “gold commission” set to become part of official Republican party 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.The move shows how five years of easy monetary policy — and the efforts of congressman Ron Paul — have made the once-fringe idea of returning to gold-as-money a legitimate part of Republican debate. . . .
Here is the recent history of gold prices. The stability up until the 1970s is an illusion because the value of the dollar was fixed in terms of gold. But the extreme volatility of gold prices since then shows what would have happened to inflation and deflation if we had been on the gold standard. Between 2001 and 2011, the price of gold rose by 5.8 fold. What would have cost $100 in 2001 would apparently only cost $17.24 in 2011. Could you imagine the chaos created by having that average change in prices over a decade?
UPDATE: What did inflation rates look like when countries were on the Gold Standard? Here are some numbers for the UK (the entire 1750 to 1998 period is available here). Even if the price level was relatively constant over the long run, you seem to have significant swings from one year to another. Here is some information on the adoption dates for the UK: "On 22nd June 1816, Great Britain declared the gold currency as official national currency (Lord Liverpool’s Act). On 1st May 1821 the convertibility of Pound Sterling into gold was legally guaranteed."
UPDATE: What did inflation rates look like when countries were on the Gold Standard? Here are some numbers for the UK (the entire 1750 to 1998 period is available here). Even if the price level was relatively constant over the long run, you seem to have significant swings from one year to another. Here is some information on the adoption dates for the UK: "On 22nd June 1816, Great Britain declared the gold currency as official national currency (Lord Liverpool’s Act). On 1st May 1821 the convertibility of Pound Sterling into gold was legally guaranteed."
Labels: gold standard
posted by John Lott at 3:47 AM
8 Comments:
That isn't a good metric because you are viewing gold through the lens of dollars, which we know is volatile as well. Look at purchasing power. It has been said that, in gold terms, the price of a suit on Savile Row has been pretty much the same since there was a Savile. If I were using gold as money, I would not be using it to buy dollars, but groceries and other goods. So, you have to show the volatility exists there, and you have to take into account highly manipulated markets, like oil, where the chief driver of the price seems to be government policy and not supply and demand.
So the inflation and unchecked borrowing by the fed and congress is better than the possible fluctuation in gold prices? Gold as a standard has worked for millennia. Fiat money is great for warring empires, which is basically what we are, but we need to leave the warring business behind and start living within our means.
John, Thanks for weighing in on the gold standard business. I think there is a terrible underappreciation among many on the right for the perils of deflation, and how a gold standard can increase the odds of such. Sad to see GOP economic policy being determined by the likes of Ron Paul and Glen Beck.
John, the behavior of the dollar price of gold during a period when gold is demonetized is a poor guide to the behavior of the purchasing power of gold when gold is money. (It's a simple enough Lucas- critique point.) If you look at a chart of the dollar price level while the dollar was defined as a mass of gold, you won't see wild swings. In fact you'll see greater stability than we have today.
"The stability up until the 1970s is an illusion because the value of the dollar was fixed in terms of gold."
I don't recall anybody complaining about a ridiculous sway in the price of goods between 1850 and 1970.
I follow you closely John, but I don't get the connection you drew here... Sounds like something you'd call someone else out for making...
A true free currency would not necessarily involve a gold standard, but would legalize competition. People would be allowed to transact in any currency including gold and silver as they choose, without running afoul of legal tender laws. They would also not be forced to pay sales taxes or capital gains taxes on these instruments as they are today. Then people would be free to choose the most stable, lasting currency. If they would like to stay with the fiat federal reserve dollars then fine they can do that. Most people would dump the paper in favour of something hard.
I am not an economist, but I am an engineer. I was floored by this, what seems to me to be a static analysis of the kind you, John, have criticized.
Your observation of instability is that of the instability of the dollar, not the value of gold. Gold's purchasing power, it's real value, is remarkably stable.
It could well have been that tying the dollar to gold would have stabilized the dollar.
It is hard to imagine that connecting the dollar to gold would not have a result that is different than the independent behavior of either one. I think the idea of the plan is to stabilize the value of the dollar, and to prevent administrations as we have now from creating hyper-inflation by printing money.
Dear Larry:
Thanks very much for the note. It is great to hear from you. I have put in some numbers on the variability of prices while the UK was on the Gold Standard. It appears that one sees wild swings in the price level during the time period that they had a gold standard. The problem is that you got a lot of ups and downs from year to year and you never knew whether there would be new gold discoveries suddenly leading to inflation or whether there would be few discoveries or unexpected drops in production with a growing economy and deflation.
Dbowhunter:
The variability of inflation during a gold standard is relatively well known, though you can see what it looks like from the UK data shown above. The point of what you quote from me was a completely different issue. It is simply a definitional issue when the price of gold can't change in terms of dollars because it is set in terms of dollars.
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