Why Are Economists Allergic To Gold?
Some 32 years ago, Ronald Reagan ran for U.S. President, in part, on a promise to appoint a “gold commission” to study the issue of whether and how the United States should return to some variation of the gold standard.
The nation had just come through a couple of tough decades during which, at times, it seemed as if the whole fabric of American society was being ripped apart. Devastating inflation and a lagging economy only made worse the social and emotional turmoil created by changing mores and standards surrounding civil rights, gender roles and military intervention. President Richard Nixon’s shocking act of severing the U.S. dollar’s ties to gold had failed to bring economic prosperity to the nation, and the Republican Party was feeling a bit of buyers’ remorse. The idea of a return to a gold-based monetary system gained steam.
A recent New York Times article describes the pre-election environment:
Once in office, Reagan made good on his promise to establish a gold commission…but any hopes for a serious effort to restore the gold standard were all down-hill from there. When the report finally came out, it recommended that the United States stick to its status quo, fiat currency system. The Times article continues:
Only two commission members dissented from the report: Lewis Lehrman, the author of a recent book titled “The True Gold Standard,” and a young Texas congressman, Ron Paul.
Fast forward to 2012. The United States is once again in the midst of a presidential election year. As in 1980, the Democratic incumbent is saddled with a economy in recession. And at least two of the candidates contending for the GOP nomination are waving the gold flag. One is that same dissenting congressman, Ron Paul. The other is former House Speaker Newt Gingrich, who has promised to establish a new gold commission, with the second 1980 commission dissenter, Lewis Lehrman, as co-chair.
It’s impossible to know whether Gingrich’s gold commission would be any more relevant or effective than Reagan’s was. But another striking historical parallel with 1980 is the intransigence of the financial establishment about gold.
Just as Reagan’s economic advisers were staunchly against a return to gold-backed currency, as the New York Times reports, every economist surveyed recently by the University of Chicago rejected the notion that a gold-backed currency would improve the economy.
As the article notes, the single most appealing feature of fiat currency to economists and central bankers is its “flexibility”—in other words (our words), you can print as much as you need to do whatever it is you want to do.
“The gold standards add credibility when a country lacks discipline.” Some might say, in this déjà vu election year, that most modern nations have demonstrated a severe lack of discipline, and that credibility is in seriously short supply. Whether a Republican, if elected, would buck the financial elites to seriously consider a restoration of a gold standard remains to be seen. We say, let’s establish a truly objective commission and see what they come up with. After all, how much worse could it get?