Say this for the GOP: by resurrecting the very bad, no good, truly awful idea of a gold standard, they’ve given us something to talk about.
Matthew O’Brien makes one obvious point: anyone who believes that the gold standard era was marked by price stability, or for that matter any kind of stability, just hasn’t looked at the evidence. The fact is that prices have been far more stable under that dangerous inflationist Ben Bernanke than they ever were when gold ruled.
I’d like to offer a different take. There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth. Here’s the real price of gold — the price deflated by the consumer price index — since 1968:
That’s a pretty huge range of variation. What’s going on?
Well, there may be bubble aspects, but there’s also a pretty clear (and economically understandable) relationship between the real price of gold and the real interest rate: when real rates are low, real gold prices are high.
And when are real rates low? High inflation can do that, as it did in the late 1970s; but so can a severe economic slump due to a deleveraging shock, as in recent years.
What does that tell us about how a gold standard would work? Faced with the kind of shock we’ve just experienced, the real price of gold would “want” to rise. But under a gold standard, the nominal price of gold would be fixed, so the only way that could happen would be through a fall in the general price level: deflation.
So if we’d had a gold standard operating in this crisis, there would have been powerful deflationary forces at work; not exactly what the doctor ordered.
Now, the gold bugs will no doubt reply that under a gold standard big bubbles couldn’t happen, and therefore there wouldn’t be major financial crises. And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait.
The truth is that returning to gold is an almost comically (and cosmically) bad idea.