Fed Economist Squashes Gold Bugs
The St. Louis Fed has a “Reader Exchange” column that once and for all destroys the argument in favor of a gold standard:
Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.
This historical example demonstrates that the gold standard is no guarantee of price stability.
If I might paraphrase:
A gold standard will never work because, back in the 1930s, we had a gold standard. When the gold standard was ended by FDR, the result was a 70% devaluation of the dollar and significant price inflation.
Therefore, a gold standard won’t work.
Wow. This is a devastatingly strong argument against the gold standard, so much so that I would love to see any kook refute the inherent logic.
If anything, this is a great example of why we should trust the government to have as much control over the money supply as possible. Government intervention will continue to prevent price stability and government growth-limitations that would be present in a gold standard that is not controlled by the government.
This argument was brought to you by:
David Andolfatto is an economist and vice president in the Research division. He joined the St. Louis Fed in 2009 after teaching economics at Simon Fraser University in Vancouver and at other universities in Canada.
To tell him how brilliant he is:
Phone: (314) 444-4714
Fax: (314) 444-8731