A goldbug for the Fed?

When I teach my Essential Macroeconomics for Managers course, I spend some time on exchange rates.  I emphasize the role of trade balances, inflation, and Federal Reserve policy, reflecting the consensus of economic research.  I spend no time on the gold standard, as research has shown that it makes economic growth and inflation less stable.  

President Trump has nominated Judy Shelton for a vacant position on the Federal Reserve's Board of Governors.  Dr. Shelton (PhD in business administration from Utah) advocates a return to the gold standard.  Greg Ip has a great WSJ column explaining her views, which are based more on politics than economics.  Her core belief is that the gold standard would impose fiscal discipline on Congress and the President and monetary discipline on the Federal Reserve.  She went ballistic in the aftermath of the Great Recession when quantitative easing led to a massive increase in the money supply and, she argued, an inevitable surge in inflation.  Guess what?  She and other goldbugs were dead wrong; inflation has been at rock-bottom levels for the last 10 years.

Now she is criticizing the Fed for keeping interest rates too high, claiming it is slowing down the economy.  This is hard to swallow in a world where 10-year Treasuries yield two percent and the June jobs report showed 224k new jobs last month.  Will she make it through tough questions at her Senate confirmation hearing?  Stay tuned.

Sensible analysis of the gold standard

We continue to have a small but vocal minority (I'm talking to you James Grant and Ron Paul) that blames virtually all of our macroeconomic problems on our departure from the gold standard in 1971.  Chicago Booth finance professor John Cochrane has a great WSJ op-ed this weekend that does a great job explaining why the traditional gold standard would fail miserably in today's world: the price of gold fluctuates much more than the CPI, it would do nothing to stop the Fed from buying and selling securities and would readily be abused by governments facing piles of debt.  Best line: "This isn't theory.  It's history."

Cochrane argues that the idea behind the gold standard has one virtue: it commits the government to exchange each unit of currency for something real.  He argues this could be done more easily by having the government commit to buy and sell CPI-indexed bonds at fixed prices.  The key words in this idea are "at fixed prices;" it does not take much cynicism to imagine a debtor government welching on its side of the deal.  

If you were wondering about the gold standard

Political campaigns make for great entertainment, as they always feature supposedly "new" ideas about how to help the economy.  Newt Gingrich and Ron Paul have been urging the public to consider going back to the gold standard.  That would mean there would be a fixed exchange rate between the dollar and the price of gold.  There is a long history on how fixed exchange rates in general and the gold standard in particular operate.  Like any other form of price control, there's lots of deadweight loss involved. 

But why take my opinion?  Chicago-Booth polled 50 leading economists concerning the desirability of moving back to the gold standard.  These are economists coming from the full range of the political spectrum and all of them have published regularly in the very top journals.  The results showed a strikingly rare degree of unanimity: every single one of them disagreed and most disagreed strongly with the proposition that the gold standard would improve price stability and living standards for the average American. 

A couple of priceless comments: "Gold is intrinsically close to useless, so its price is determined as a "bubble" from Daron Acemoglu (MIT) and "Why tie to gold? why not 1982 Bordeaux?" from Richard Thaler (Chicago).