During Tuesday night’s Republican debate a familiar topic resurfaced to the dismay of most economists: the case for the gold standard.
Senator Ted Cruz criticized the Fed’s ability to manipulate monetary policy (a common refrain among gold-standard advocates) saying, “Instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is ... keeping our money tied to a stable level of gold.”
This wasn’t the first time that a GOP hopeful had tried to revive the idea of linking the dollar with the precious metal. Both Rand Paul and Ted Cruz have broached the idea, though not always so explicitly, as part of their monetary policy in the past few months. Additionally, in 2012, Ron Paul included it in his platform.
These conversations may be less an attempt to actually convince rivals, lawmakers, or voters that the gold standard is sound fiscal policy, and more about displaying commitment to conservative ideals, wooing big donors, and demonstrating a substantial disdain for current monetary policies.
In general, economists agree that the gold standard is a bad idea. Pegging the dollar to the metal is, in theory, supposed to offer long-term rate stability. But in practice, that hasn’t usually worked out. In the short term, linking dollars to gold quantities can produce a currency that’s pretty volatile.
America first tweaked its relationship with gold during World War I. It suspended the gold standard in 1933, and abandoned it altogether in the 1970s. So why is this rejected plan popping up four decades later?
The conversations about gold in recent years are perhaps less about the belief that it’s actually smart policy and more about condemning and rejecting the power of the government, through the Federal Reserve, to control the printing of money and the setting of interest rates. For some conservatives these powers stand in direct opposition to their preference for small government and their conception of free-market capitalism. Some also see the ability to print money, which can devalue existing dollars, as a form of taxation, another violation of Republican beliefs.
The gold-standard advocates are not only politicians. They include a small but vocal (and rich) minority of Wall Streeters and hedge funders still angry about the Fed's low-interest rate (read: low yields) put in place during the 2008 crisis and lasting until today. This minority is an influential one, especially when it comes to political campaigns, because of its ability to drum up large sums of money. For example, the hedge-fund manager Robert Mercer, who favors the gold standard, donated millions to four super PACs affiliated with Cruz's campaign.
For candidates, a fixed-currency talking point is not only a chance to appeal to big spenders, but also a chance to criticize the Fed, a group that Cruz last night called a “series of philosopher kings.”*
But a reversion to the gold standard doesn’t have a ton of support, especially among experts. Many economists see the power to manipulate policy in reaction to the ups and downs of the economy as the natural evolution of fiscal policy. The purpose of this power is to ward off or lessen financial disasters through keeping rates artificially low or introducing more money into the system, or doing the opposite to rein in inflation during periods of growth.
Pegging money to gold ounces offers no such protection, and in fact could be quite dangerous. While the commodity has long been considered valuable, it isn’t immune to declines. The price has fluctuated significantly over the years, and hit a five-year low in July. As Matthew O'Brien noted in a 2012 article in The Atlantic, the ability to print money under a gold standard relies on how much gold can be found at any given time. That could create an economic disaster that has little to do with actual economic trends. With an economy that’s just starting to show some signs of life after the recession, that’s a problem the country certainly doesn’t need.
*This article originally misattributed this quote to Donald Trump. We regret the error.