In January 1986, Ronald Reagan marched into a meeting of his economic advisory board and let off steam about inflation. “I used to pay $50 for a suit,” he fumed. “Now $50 will hardly get it cleaned.” By way of a culprit, Reagan fingered the idea of fiat currency — currency that is not backed by gold or some other commodity, and that can therefore be printed at will, in unlimited quantities. “Is it possible for mere human beings to decide how much money should be put out?” he wondered. The way the president saw things, the remedy to inflation was to go back to a simpler time, when money was gold and mortals could not manipulate it.
If Reagan’s nostalgia about the gold standard was curious, the survival of this sentiment in 2019 is even more baffling. From the vantage point of the 1980s, the Federal Reserve’s feckless response to the stagflation of the Ford and Carter years was still a recent memory. From the perspective of today, in contrast, the Fed has a remarkably good record in delivering price stability. Yet the absence of a malady has not stopped Reagan’s successor from hankering for a cure. “Bringing back the gold standard would be very hard to do, but, boy, would it be wonderful,” Donald Trump ventured in 2016. “We’d have a standard on which to base our money.”
Now Trump appears ready to nominate Judy Shelton, an advocate of the gold standard, to serve as one of the seven governors on the Federal Reserve Board. Unlike the last two candidates in whom Trump seemed interested, Shelton already holds a Senate-confirmed job — she is U.S. director for the European Bank for Reconstruction and Development — so her path to confirmation may be easier. And although Shelton’s lone vote would not alter Fed policy, her elevation would give voice to a maverick perspective, encouraging other gold believers — such as Sen. Ted Cruz (R-Tex.) or Sen. Rand Paul (R-Ky.) — to speak up more freely.
Shelton makes two arguments for the gold standard. She suggests that tying the dollar to the more or less fixed supply of precious metal would prevent the Fed from conjuring money out of thin air. Yet the past decade has witnessed a momentous experiment in monetary conjuring, and the verdict is in. Without the Fed’s prodigious “quantitative easing,” the economic recovery after the 2008 crisis would have been even more sluggish. Meanwhile, the alleged downside of QE — a surge in inflation — has failed to materialize.
Second, Shelton argues that a global monetary system tethered to gold would prevent currency manipulation, thus putting trade on a fairer and more level playing field. But, also in the past decade, the main reason to worry about currency manipulation has vanished. In 2007, China’s current-account surplus stood at a whopping 10 percent of gross domestic product, strong evidence that its currency was undervalued. In 2018, China’s surplus was down to less than 1 percent of GDP, implying that the renminbi is fairly valued. Today, the big economy with the most significant surplus is Germany. But Germany can hardly be said to be manipulating its currency because it doesn’t have one. Along with 18 other countries, it uses the euro.
Other commentators, including the former Fed chairman, Alan Greenspan, have advanced moral reasons to believe in a gold standard. Paper dollars are IOUs from the government, and we are willing to hold them because we believe that the government will have revenue to pay us back. But this belief is founded on the ability of the government to compel payment of taxes: The dollar’s ultimate backing, the 37-year-old Greenspan wrote, is “the muzzle of the gun of a government bureaucrat.” This logic is faultless, but you have to be an extreme libertarian to care. If you don’t think governments have a right to collect taxes, you had better live in a space colony.
Proponents of the gold standard also like to say that it will discipline bankers. In the days of the 19th-century gold standard, the government could not print money to bail out lenders, so improvident financiers were properly punished during crises. Believing that such salutary lessons might have prevented Wall Street’s 1929 bust, the youthful Greenspan condemned the creation of the money-printing Fed as “one of the historic disasters in American history.” But the moral hazard generated by bailouts is far less costly than the damage created by contagious panics. As Fed chairman, the mature Greenspan was celebrated on the cover of Time as the rescuer in chief of the global financial system.
Money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, somehow reliable and real; there will always be people who believe in it. But the truth is that modern central banking is one of those elite inventions that generally works. The gold standard has given way to the PhD standard, and we are all the better for it.