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The Gold Standard Is A Terrible Idea

Judy Shelton, whom Trump has floated as his next nominee to the Federal Reserve Board, favors returning to the gold standard, writes Rich Barlow. (AP/Andrew Harnik)
Judy Shelton, whom Trump has floated as his next nominee to the Federal Reserve Board, favors returning to the gold standard, writes Rich Barlow. (AP/Andrew Harnik)

“Who knew health care could be so complicated?”

“Trade wars are good, and easy to win.”

Everybody gets a tax cut, especially the middle class.”

Ignorance threads through President Trump’s utterances about economic policymaking. Its latest incarnation is in the form of one Judy Shelton, whom the president has floated as a likely nominee for Federal Reserve Board governor. People know soap opera-y things about Trump’s two failed nominees to fill vacant seats on the central bank’s seven-seat board: Stephen Moore was a child-and-wife-support deadbeat; Herman Cain is an accused sexual harasser.

What most probably don’t know is that those men and Shelton, who currently serves as the U.S. director of the European Bank for Reconstruction and Development, have supported a gold standard. It’s such a bad idea that Moore found it necessary to lie about having ever endorsed it.

Depressingly, many Americans might not hold Shelton’s support of the gold standard against her; some years ago, one poll found 44% of likely voters agreed or were at least open to the idea.

As a glass-half-full type, I’m thankful for the other 56%. Like the Trump pronouncements I cited above, the gold standard is an excursion into nuttiness. Under it, paper money can be redeemed for a set amount of gold; and the federal government can't circulate more money unless it increases its holdings of gold. (Currently, we operate on "fiat money," with our currency backed by the government's promise of its worth rather than a physical commodity.)

The gold standard would be risible were it not also dangerous, given that so many in the public aren’t aware of how it could endanger their jobs if and when the next recession comes. Shelton’s support for it is grounds for giving her the same hook that yanked Moore and Cain off the Fed stage.

The clearest explanation of why returning to the gold standard would be “one of the worst economic ideas in the world,” as the Washington Post headlined it, turns on two questions: Why did the U.S. abandon the gold standard? And why does Shelton want to go back on it?

... the gold standard is an excursion into nuttiness.

We effectively ditched the gold standard in 1933. President Franklin Roosevelt wanted to cut this anchor from the money supply so the Federal Reserve could inflate the currency as a stimulus against the Great Depression. FDR signed legislation requiring the public to surrender most of its gold, thereby boosting the government’s holdings, and then raised the set price of that gold. The result was indeed a goosing of the moribund economy.

That result was hardly surprising. An accidental version of FDR’s policy had helped end the 1890s depression, second-worst only to that of the 1930s. (“Accidental” because, while the U.S. clung to the gold standard through that earlier depression, worldwide gold strikes and more efficient refining techniques showered the economy with the precious metal, inflating the money supply anyway.)

Only a monetary masochist wants to handcuff the government in battling capitalism’s inevitable busts. So why is Shelton a goldbug? In an article last year for the libertarian Cato Institute, Shelton argued that without tethering a currency to gold, nations “use monetary policy to deliberately manipulate their currencies to gain an advantage over trade partners” in violation of free and fair trade. The recent example was China, which undervalued the yuan against the dollar to make Chinese exports cheaper.

But note the past tense: That "was" the recent example. China’s undervalued currency rose to more appropriate levels long before Trump took the oath of office. Shelton is basing her position on old data and an argument past its expiration date.

Shelton’s support for [the gold standard] is grounds for giving her the same hook that yanked Moore and Cain off the Fed stage.

More damningly for her case, she approvingly quoted Trump’s stated rationale for gold: “We’d have a standard on which to base our money.” The president was channeling a screwball strain of thinking, held by cranks from Ron Paul to Ted Cruz, who argue that with fiat money, government can print dollars 24/7 and ignite runaway inflation.

I’m not making this up: former Republican House Speaker Paul Ryan predicted the Fed would “debase” the currency as it fired loose money at the Great Recession. You know how that ended: The inflation-hysterical among us were proven wrong. Loose money made the slump less awful than it would have been without sparking out-of-control price hikes. (There’s a graphic representation of the hysterics’ wrongness here.)

“Although Shelton’s lone vote would not alter Fed policy, her elevation would give voice to a maverick perspective,” writes Sebastian Mallaby, an international economics senior fellow at the Council on Foreign Relations, engaging in Christian charity with the use of “maverick.”

“Harebrained” is more like it.

Related:

Rich Barlow Cognoscenti contributor
Rich Barlow writes for BU Today, Boston University's news website.

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