What about the argument that the gold standard contributes to painful deflationary episodes such as the Great Depression? Before simply blaming the Depression on the gold standard, one needs to consider the fact that the interwar gold standard, unlike its prewar predecessor, required significant coordination on the part of central banks to manage gold reserves in order to maintain exchange rates.
Poor policy decisions by the Federal Reserve and the Bank of France during this period led to gold hoarding, which shrunk the global money supply, further exacerbating the downturn. Therefore, it may be more accurate to describe the Great Depression as a central bank failure rather than the failure of a pure gold standard.
As indicated by the historical record, a gold standard regime is not necessarily a bad idea. The classical gold standard performed comparatively well in its day. However, a gold standard regime is not necessarily a good idea for today because virtually every country now has a central bank, and central banks are major players in monetary policy and financial markets.
Unless we abolish central banks an unrealistic proposition , instituting some sort of gold standard—like system would require trusting central bankers to administer the system well. Given the disastrous results of the interwar system as well as the end of the ill-fated postwar Bretton Woods System which also proved difficult to implement as its fragile design prompted attacks from speculators seeking to game exchange rates they believed central banks could not credibly control , it seems unlikely that a current-day version of a gold standard would work well.
Moreover, as the interwar experience shows, severe economic downturns brought on by poor monetary policy can lead to support for less market-oriented policies, as politicians blame the downturn on supposed inherent flaws of the market economy rather than on bad policy.
Shelton is right to desire a monetary regime that is rules-based and that brings about stability. The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits. It was a devilish device for turning recessions into depressions. The answer is that some people aren't worried about depressions. Some people are worried about inflation.
Even when none exists. To them, these fetters are the feature, not a bug. It's a simple idea. If governments can't print or spend too much money, prices should be stable. Simple, but wrong. Not exactly an, ahem, golden age of price stability.
The gold standard should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead. In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn't just about avoiding inflation; it's about avoiding deflation too.
The gold standard wasn't good at either -- especially compared to our modern inflation-targeting system. Consider the same chart of headline CPI inflation, this time since the Federal Reserve began quantitative easing in November Now that's what stable prices look like. There's been 23 times less variance in prices since the Fed started quantitative easing than there was under the gold standard. Though Powell distanced himself from the Fed nomination process, his comments put him at odds with the writings of Judy Shelton, a current nominee to the central bank.
VIDEO The US should not return to the gold standard for its currency: Jerome Powell. Jerome Powell, chairman of the U.
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