What would happen to the money supply if we went back to the gold standard?

Gold bars and coins at a gold merchant in London. Photo by Chris Ratcliffe / Bloomberg / Getty Images

Paul Solman frequently answers questions from NewsHour audiences on business and economic news on his Making Sen $ e page. Here is Wednesday’s request:

Last name: Vernon Robinson

Question: Many members of the far right or the Tea Party defend the Gold Standard, [that] the dollar should be pegged to gold. How – or in the past, how did it work? What are the ramifications? The last report I read said the US government had $ 86 billion in gold bricks. If the country reverted to the gold standard, would that mean that there would only be $ 86 billion in foreign exchange available? Moreover, with the way the banks operate – which they always create with loans – would putting the United States on the gold standard reduce the money supply?

Responnse: Two slight tweaks to your email, Vernon. First, the United States claims to have over half a trillion dollars of gold at current market price. Second, the purpose of a gold standard would be to stabilize and restrict the money supply, not to reduce it. Now support me as I explain the mechanics to you.

The scarecrow of the “golden bugs”, a term for those who promote the gold standard, is inflation, what they call the “degradation” of “fiat” money: money created by decree. government. In the past, it was “paper” money. Today, it’s mostly electronic.

It is said that the means of debasement is the removal of precious metals from silver – mainly, less gold and silver. Or, as is the case today, the total withdrawal – and the withdrawal of any government promise to redeem paper money, or its electronic equivalent in your bank account, for such “precious” metal.

In a recent so-called “Paul vs. Paul” debate on Bloomberg TV, liberal columnist and Nobel economist Paul Krugman accused libertarian politician Ron Paul’s support for a gold standard would set America back 150 years. Ron Paul replied that Krugman would set America back 1,000 to 2,000 years, “just as the Romans and Greeks or others debased their currency.”

Krugman smiled, perhaps with a hint of disdain, and retaliated, “I am not an advocate of Diocletian’s economic policies.” (Diocletian reigned from 284 to 305 CE and was famous for fueling Roman inflation via a policy of debasement, although the reduction in the precious metal content of Roman coins was already as old as the Empire itself, as illustrated in a graphic linked here.)

When it comes to “fiat” money, Ron Paul’s website suggests utter disregard for the true uncritical believer. The very first paragraph quotes a strange “expert” (and oddly refers to Rome):

Henry Ford once said, “It’s good that the people of the nation don’t understand our banking and monetary system, because if they understood it, I think there would be a revolution before tomorrow morning.

Unfortunately, it is the same Henry Ford who also said: “Wait until America awakens to the Jew! … There is a race, a part of humanity, which has never yet been received. as a welcome party, and which has succeeded in ascending to a power that the proudest pagan race has never claimed – not even Rome at the time of its proudest power. “

Of course, Ron Paul’s citation of questionable authority does not invalidate the idea of ​​a gold standard. I leave that effort to Federal Reserve Chairman Ben Bernanke, appointed by Bush II, who gave this explanation to a group of students in March:

The gold standard would not be achievable for both practical and political reasons. On a practical level, there is simply not enough gold to meet the needs of a world gold standard. But more fundamentally than that, the world has changed … In a modern world, commitment to the gold standard would mean that we swear that under no circumstances, however severe the unemployment, are we going to do what. whether using political money.

That is, first of all, as the world economy grows, the total amount of world gold is unlikely to keep pace. And second, if a government cannot create more money when people refuse to spend or lend, how will unemployment ever be dealt with?

In fairness to Fed skeptics like Ron Paul and others, the track record of governments creating money is not exactly flawless. Soaring inflation has plagued political regimes from Imperial Rome to present-day Zimbabwe, from Germany in the 1920s to unofficial world record holder Hungary in 1946. And the “fine-tuning” of the central bank hasn’t always done wonders either. It may well be that more fiat money isn’t the Rx for the unemployment that plagues us – that actions like the Fed’s have a lot less effect than the Fed or its champions believe.

But there is little in the historical record to suggest that a return to gold would be preferable. And many to suggest the opposite.

Since it’s July 4th, let’s give the last word to Alexander Hamilton, who lobbied the newsprint for the Constitution’s passage in 1787 in Federal Paper # 30:

Money is, with propriety, regarded as the vital principle of the body politic; as that which sustains its life and movement, and enables it to perform its most essential functions. Complete power, therefore, to procure a regular and sufficient supply of it, as much as the resources of the community will allow, can be seen as an indispensable ingredient in any constitution.

PS ps: A July 4th extra. Today’s New York Times features two faces of Thomas Jefferson, literally back to back. On the editorial page, Kurt Anderson’s compelling column on Self-Indulgence and the Sixties features this quote from the benevolent Founding Father:

Self-esteem is not part of morality. Indeed, it is exactly its counterpart. It is the only antagonist of virtue that constantly drives us through our self-righteousness propensities in violation of our moral duties to others.

On the back of the page, the Times reproduces, in its entirety, the Declaration of Independence. From the start, of course, are Jefferson’s obvious truths, written 38 years earlier than the self-esteem quote: “That all men are created equal, that they are endowed by their CREATOR with certain inalienable rights.” , among which is life, freedom and the pursuit of happiness.

Then comes the memoir in the name of independence, which lists a “History of repeated injuries and usurpations” – “Facts submitted to a candid world”. And finally, after a series of specific complaints about King George III, unfair taxes on quartering troops, here is it:

“He has stirred up domestic insurgencies among us and has endeavored to draw upon the inhabitants of our frontiers the ruthless Indian savages, whose known rule of war is indiscriminate destruction of all ages, sexes and conditions. “

A sobering reminder, for those who may have forgotten slave ownership or Sally Hemmings, that benevolence had its distinct limits 236 years ago today.

Editor’s Note: An updated version of this blog post was posted at 2:45 p.m. EST.

This entry is crossed on the Making Sen $ e page, where correspondent Paul Solman answers your economic and business questions.

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