The Gold Standard Idea Will Not Die

SMITH BRAIN TRUST – The United States effectively abandoned the gold standard in 1933. But as an idea, it never really seems to go away.

It’s an idea that’s popular among a small segment of Americans, those who deeply worry about so-called fiat currencies and the potential for a lack of discipline among monetary authorities. They fear that the Federal Reserve will issue too much money, leading to a kind of Weimar Republic-era inflation situation.

So the gold standard comes up from time to time. And each time, Maryland Smith’s David Kass finds himself shaking his head. “The gold standard,” he says, “is no panacea. Not by a very, very long shot.”

That’s why when the issue resurfaced on The Wall Street Journal’s op-ed pages earlier this month (with James Grant’s “The Fed Could Use a Golden Rule”), Kass was compelled to pen a response.

The so-called gold bugs, those who would advocate for a return to the gold standard, are averse to the notion that the government might simply print money as a method to escape an economic downturn. They understand the potential inflationary pressures that could result from an increase in the country’s money supply.

It’s a reasonable worry, Kass says, but it’s one that is addressed by the nature of the Federal Reserve’s dual mandate. That mandate states that the Fed will set monetary policy to provide for maximum employment and price stability.

Here is Kass’ full letter to editor, which was excerpted recently in The Wall Street Journal:

Regarding James Grant’s, the Fed Could Use a Golden Rule op-ed, dated July 12, It seems that the author is suggesting that the Federal Reserve should abandon its congressional mandate of conducting monetary policy to achieve the dual objective of maximum employment and price stability. Instead, Mr. Grant suggests that through the reintroduction of a gold standard the Federal Reserve would abandon its statutory mandate and effectively place monetary policy in a straightjacket.

The U.S. began to recover from the Great Depression of the 1930s when President Franklin D. Roosevelt cut the dollar’s ties with gold, which allowed the government to issue more money to lower interest rates. Similarly, the current record-long, 10-year expansion following the Great Recession of 2007-09 was greatly facilitated by the accommodative monetary policy implemented by the Federal Reserve. No other country uses a gold standard. Gold today isn’t being used as currency, but instead it is an alternative asset class that is being used as a speculative store of value.