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Sorry Ted Cruz, The Gold Standard Really Isn't A Good Idea

This article is more than 8 years old.

At the Republican debate Senator Ted Cruz suggested that perhaps America should move back to the gold standard. No, this isn't a good idea, it's a terrible one, around and about as terrible as Bernie's idea of a $15 minimum wage. Showing that bad economic ideas are indeed distributed across the political spectrum. The reason that it's a bad idea is simply that there just isn't any good reason why a dollar should be worth any certain amount of gold: for exactly the same reason that there's no reason, good or bad, why a certain amount of gold should be worth a certain number of dollars. We're in a market based system: and in market based systems we allow supply and demand to determine what the price of something is. Money, in this sense, is only the intermediary, the means of measuring the exchange, and there's just no reason, as above, why that should be fixed to some amount gold, no more reason that it should be than that it should be fixed to a certain number of apples. Because the supply and demand of gold does change, as does the supply and demand for apples. We even have changes in the supply and demand for money, as the recent Great Crash has shown us, and we both need and desire to have the price system adjust prices as a result of such supply and demand changes. In fact, that's the very point of having a market economy in the first place.

Greg Ip gets the general economists' reaction to the suggestion:

Texas Sen. Ted Cruz reiterated his support for returning to the gold standard in this week’s presidential debate. Kentucky Sen. Rand Paul has said the idea should be studied. Neurosurgeon Ben Carson alluded to the idea, saying, “We’ll have to tie our currency to something,” while former Arkansas Gov. Mike Huckabee advised, “Tie the dollar to something fixed and if it’s not going to be gold, make it the commodity basket.”

To say the least, this puts them outside the economic mainstream. In a University of Chicago survey of top academic economists of all ideological persuasions, not one advocated returning to the gold standard. “Love of the gold standard implies macroeconomic illiteracy,” declared respondent Anil Kashyap, also of the University of Chicago.

As the AEI notes that survey is pretty emphatic.

Eric Rauchway in the NYT is also dismissive of the idea:

Mr. Cruz correctly notes that the world economy enjoyed decades of prosperity under Bretton Woods, but that happened without a gold standard, not because of one. Why is a discredited policy now attractive to Republicans? The gold standard suits a political moment. Tying the dollar to an arbitrary quantity of shiny metal binds policy makers’ hands, robbing them of their discretion to act: The central bank can’t adjust the money supply to counteract crises or prevent them. These limits, for many Republicans, are good things. The gold standard is essentially the monetary equivalent of a government shutdown.

I'm not sure I would go that far but a return to the gold standard is very definitely a bad idea. Because it does tie the money supply to some fixed quantity. And we don't want the money supply tied to any fixed quantity. We would not be able to do something like quantitative easing, as an example, if we were on the gold standard. Because the M in our MV=PQ would be a fixed number. And as we've seen in these recent years we desperately want to be able to vary M as V varies. One way of describing the disaster that has befallen the Greek economy is exactly that they've not been able to vary M as V has so varied and that's the reason they're in the hole they're in. And while Greece might have better olives than the US it's still not true that we would like, as a matter of public policy, to turn the next American recession into the Depression that Greece is currently struggling through. Thus we don't want to move to a fixed quantity of money, no not even the gold standard.

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