When World Bank President Robert Zoellick suggested the other day that the world needs to embrace a gold standard (of one kind or another) once again, he made Robert Mundell, the famous globe-trotting Canadian-born economist, look eerily prescient. Back in 1997, Dr. Mundell predicted a return to gold “maybe in 10 or 15 years” – in other words, by 2012. Here’s a distinctly improbable prediction that’s looking better all the time.Of course Zoellick has been roundly mocked for this suggestion, including in the Globe itself a few weeks ago, and it really is a goofy idea, although a popular one with the magical thinkers who like to call themselves 'fiscal conservatives'.
Rep. Mike Pence (R-IN), a top House Republican and possible 2012 presidential contender, gave a speech at the Detroit Economic Club this afternoon outlining his “prescription for a fresh start for the American economy.” The Detroit Economic Club is a “popular venue for candidates testing the presidential campaign waters,” and Pence is “working hard to cultivate support among the fiscal conservatives that are driving the tea party.”The Thinkprogress piece links to an old article by Paul Krugman seeking to just scratch the surface of all the many and manifold reasons why this is an incredibly stupid idea:
The first item of Pence’s five-point plan for the economy is a “sound monetary policy.” Pence elaborated that he believes a return to the gold standard could create such a policy
Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy--by changes, for example, in dentistry.Among other things, shifting to the gold standard would very quickly require rigid government price controls on the value of gold. Not a very small government, non-interventionist idea. But none of this simple logic keeps conservatives from pining for the good old days when things were simpler.
The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else--deflation on a scale not seen since the Depression. This doesn't sound like a particularly good idea.