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Why Are Economists Allergic To Gold?

February 4, 2012


As the old saying goes, the more things change, the more they stay the same.

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:

The 1980 Republican platformdenounced “the severing of the dollar’s link with real commodities in the 1960s and 1970s,” which it blamed for inflation. “One of the most urgent tasks in the period ahead will be the restoration of a dependable monetary standard,” it added.

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:

The commission, Murray N. Rothbard, a libertarian economist, later complained, was “overwhelmingly packed with lifelong opponents of gold who buried any call for a hard currency.” Ms. Schwartz noted that Treasury Secretary Donald T. Regan, who was the commission’s chairman, and Murray Weidenbaum, a member who was Mr. Reagan’s top economic adviser, “did not tip their hands until the final two meetings of the commission.”

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.

The University of Chicago last month asked a panel of 40 economists, including former advisers to both Democratic and Republican presidents, if they agreed that “price-stability and employment outcomes would be better for the average American” if the dollar’s value were tied to gold. Every one of them disagreed, some with more than a little incredulity that such a question was worthy of discussion.

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.

“A gold standard would have avoided the policy mistakes of the 2000s,” conceded Daron Acemoglu of M.I.T. in his response to the Chicago survey. But, he added, “discretionary policy is useful during recessions.…”
Even economists with some sympathy to gold opposed the idea. “The gold standard adds credibility when a country lacks discipline,” said Edward Lazear of Stanford, who served as chairman of the Council of Economic Advisers under President George W. Bush. “The cost is monetary policy flexibility. The trade-off is unclear in the U.S.”

“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?

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