Romney and the GOP: Serious look at a gold standard?
On Friday, we discussed whether serious monetary reform is a possibility under Romney-Ryan. We mentioned that there is significant discussion on the right as to what such a reform should look like, whereas by contrast, the left simply wants the status quo, since that enables them to continue creating and spending money without much in the way of obstacles.
The discussion on the right, on the other hand, continues to get more vibrant. Just as with the entitlements question, those who worried that a potential Romney presidency might be somewhat timid on tackling the truly big issues are pleasantly surprised to hear the subject of monetary reform being raised with more frequency. Granted, it’s not being discussed by Romney and Ryan and a major plank, but the speculation that they may have enough courage to tackle it in office is increasing—especially since the GOP is now talking about setting up a commission to look into it. The buzz is starting to build.
Case-in-point: James Pethokoukis, also on Friday:
It looks like the Republican Party will call for the creation of a national commission to examine restoring the link between the dollar and gold, a connection finally and completely severed in 1971.
Now if I were writing zingers for President Obama’s nomination acceptance speech, I would try this one out: “I’ve said before that Mr. Romney wants to take America back to the 1950s. Well, I was wrong. It turns out he and the Republican Party want to take America back to the 1850s and bring back the gold standard. You can’t make this stuff up!”
The issue does have that sort of feel about it to many people. Old fashioned. Backward looking. Odd.
But is it a bad idea?
Pethokoukis does not identify himself with the gold standard faction, preferring instead a sort of fixed, rule-based system for expanding and contracting the money supply:
I understand why some conservatives are fond of the idea of abandoning fiat money and returning to the gold standard, especially after the Great Recession and ongoing euro crisis — not to mention fears the growing national debt will prove inflationary or hyperinflationary. As George Bernard Shaw put it, “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect to these gentlemen, I advise you to vote for gold.”
But I am not there yet. As Milton Friedman famously said, ”Inflation is always and everywhere a monetary phenomenon.” Instead, I would prefer adjusting the mandate of the Federal Reserve so that monetary policy is less discretionary and more rule based.
One option is what could be called the “New Gold Standard,” the market-based targeting of nominal GDP. Economist Scott Sumner:
Most simply, the Federal Reserve should begin by adopting an approach of “level targeting” of nominal GDP. This doesn’t mean keeping NGDP level, but rather targeting a specified trajectory, such as a 5% NGDP growth path, and committing to make up for any near-term shortfalls or excesses. Thus, if NGDP grew by 4% one year, the central bank would cut rates or engage in quantitative easing until its models yielded an expectation of 6% NGDP growth for the following year. …
Another approach — which would be more radical, but perhaps also more effective — would limit the Fed’s role to setting the NGDP target, and would leave the markets to determine the money supply and interest rates. This would mitigate the “central planning” aspect of the Federal Reserve’s current role, which has rightly come under criticism from many conservatives. To give a simplified overview, the Fed would create NGDP futures contracts and peg them at a price that would rise at 5% per year. If investors expected NGDP growth above 5%, they would buy these contracts from the Fed. This would be an “open market sale,” which would automatically tighten the money supply and raise interest rates. The Fed’s role would be passive, merely offering to buy or sell the contracts at the specified target price, and settling the contracts a year later. Market participants would buy and sell these contracts until they no longer saw profit opportunities, i.e., until the money supply and interest rates adjusted to the point where NGDP was expected by the market to grow at the target rate.
It might be helpful to compare this idea to the old international gold standard. Under that system, the U.S. government agreed to buy and sell unlimited gold at $20.67 per ounce. This kept gold prices stable, and the money supply adjusted automatically. Unfortunately, however, stable gold prices did not always mean a stable macroeconomic environment. Putting NGDP futures contracts on the market along a similar model would likewise create a stable price for those contracts, hence stabilizing expected NGDP growth. And stable NGDP growth would be more conducive to macroeconomic stability than a stable price of gold, especially in a world in which rapidly growing demand from Asia might distort the relative price of gold.
Whatever comes of the commission, and of a Romney presidency, we may be looking at the first real move to alter monetary policy in quite some time. And whether we get a gold standard or some other rule-based system, conservatives should have a cautious optimism that we might, just might, see the end of unchecked fiat money sooner than we may have hoped.