Nostalgia for gold

The Wall Street Journal has demonstrated nostalgia for the gold standard by publishing two pro-gold standard opinion pieces this week. Both are long on nostalgia and short on analytical content.

On Tuesday, long-time gold enthusiast Lewis Lehrman made his pitch, arguing that a return to the gold standard was necessary to restore fiscal balance.  I began to worry when he stated that “the problem is simple.”  Our fiscal problems are far from simple.  He then went on to say that the answer was simple, and I became really suspicious.

According to Lehrman: “First, in order to limit Fed discretion, the dollar must be made convertible to a weight unit of gold by congressional statute—at a price that preserves the level of nominal wages in order to avoid the threat of deflation.”

What price would accomplish that?  Is there any guarantee that that price would remain constant? Or will Congress have to adjust the price periodically–wouldn’t that be a recipe for stability?

“Second, the government must at the same time be prohibited from financing its deficit at the Fed or in the banks—both at home or abroad.”

I’m confused.  The Treasury auctions off bonds–it doesn’t have the statutory authority to make the Fed buy them.  If you don’t want the Fed to buy treasury securities in the secondary market, say so.  Of course, such a rule would make it impossible to conduct monetary policy and interest rates would be subject to the vagaries of the gold market.

“Third, only in the free market for true savings—undisguised by inflationary new Federal Reserve money and banking system credit—will interest rates signal to voters the consequences of growing federal government deficits.”

I have no idea what that means.  True savings?

Of course, Lehrman’s argument is undermined by his praise for the fiscal policy of President Reagan.  “President Reagan was aware of the need to reform the monetary system in the 1980s, but circumstances and time permitted only tax-rate reform, deregulation efforts, and rebuilding a strong defense. And so the monetary problem remains.”

Except that Reagan’s fiscal track record was abysmal: the debt-to-GDP ratio was about 33% when Reagan came into office; it was over 53% when he left office; and over 66% when his successor George H. W. Bush left office.

Writing on Wednesday, Seth Lipsky, complains that the dollar just ain’t what it used to be.  He addresses this problem with four questions for Fed Chairman Ben Bernanke:

(1) The price of gas has risen; why hasn’t the value of money increased as well (actually, this question was about what constitutes “lawful money,” but it was phrased in terms of the price of gas)?

Because the Fed issues dollars, not gas.

(2) Why isn’t the dollar defined in terms of gold?

Because we are no longer on the gold standard.

(3) How do you feel about the fact that the price of silver has risen (this question was asked in parable form)?

(4) How do you feel about the fact that the price of gold has risen (this was also asked in parable form)?

I can’t answer for Bernanke (although I think he used the line about the Fed not being able to control the oil market in his press conference), but these questions don’t reveal much aside from a nostalgia for the good old days of the gold standard.

Lipsky should be reminded that the good old days weren’t always so good.  Barry Eichengreen’s Golden Fetters (Oxford University Press 1992) highlights the role of the gold standard in propagating the Great Depression.

For a more modern morality tale on the dangers of tying a currency to something outside national control, consider Greece’s sovereign debt crisis  Without going into a full scale discussion of the short- and long-term costs and benefits of the euro, it is clear that if the Greeks still had control of their own currency, they would have had additional options for dealing with their debt crisis.

Let’s not make policy on the basis of an idealized–but distorted–view of the gold standard.