Wednesday, November 10, 2010

Gold Standard

I hear some say "Return to the Gold Standard!"
Doesn't that make sense? Who ever let our government get away with moving off the Gold Standard (it was Nixon, btw) ? There are many issues involved, but I think I can offer up at least one kind of summary.

The bottom line is that a Gold Standard essentially limits how much a government can use monetary policy as an instrument of tweaking the economy. The tools a non-Tea Party government has at its disposal to "jump start a lagging economy" (that's the official technical term used on Econ exams...) are Fiscal and Monetary. Fiscal is having the government buy a few glasses of lemonade from the local kid to keep his spirits up and give him a little spending money himself with which to buy some sugar from Billy the sugar grower and Leona the lemon hoarder. Monetary policy is where the government can give freshly printed money to banks for just about free so that banks will have more with which to make loans to Billy so he can stock up on more sugar...though that is useless if no one is buying lemonade....

Of course, too much Easy Money via monetary policy can lead to high inflation if it backfires. And the worst thing for Rich People With Lots of Money Lent Out Everywhere is inflation ('cause by the time the borrowers pay back the loans, the money is worth significantly less). So some Rich People tend to be for a Gold Standard.

But some Rich People are for Easy Money, since its a win win deal for the Banks they might happen to own, and they'd rather Billy be forced to take out a loan from them than get a windfall in customers courtesy of Uncle Sam.

Nonetheless, having the Gold Standard ties Government hands to help the economy, so it accords well with Market Zealots.

For some discussion on this in the NY Times, see :

1 comment:

exLibertarian said...

It is interesting to consider, however, what returning to a Gold Standard would imply for Globalization...that is, a world of Free Trade. Part of the long term plan of the Disciples of Ricardo seems to require fluid currency adjustments. We were off the Gold Standard for a while before Globalization started rearing its head, and all the debates probably ASSUMED we weren't beholden to the Gold Standard.