Econbrowser has a great post up about why a return to the gold standard that was being floated around at the Republican convention over the past week for the GOP's 2012 election platform would be a very daft idea.
Return to the gold standard
"The presence of the US's elastic money supply has greatly dampened economic volatility, something that would be greatly amplified by the necessity of pro-cyclical fiscal and monetary policy within the rigidities of a Gold Standard. It is thus far from obvious that the current ability of countries like the US and UK have suffered from having such an economic policy framework.
Those making the calls for a return to the Gold Standard clearly haven't read their history well enough to recall that *all* economic entities suffered from the frequent and severe depressions and financial panics resulting from the lack of a lender of last resort and elastic currency. For all its failings, the study of economics has shown that counter-cyclical economic policies are the most successful way of a) maintaining stable but low inflation [there is a good deal of evidence that low but positive inflation is optimal] and (b) reducing economic and financial volatility. Such a framework is clearly not sufficient, as the excesses of the financial sector over the past decade or so demonstrate, but it is a good place to start, rather than throwing out the hard-won policy lessons of the past 80 years."
I have yet to get round to checking the site mentioned below in the Macroman post but more good nuggets on the inherent inflexibility and thus resulting volatility gold standards bring. Basically, in a liberal democracy implementing the pain that a rigid gold-peg would bring is very tough... not to say it can't be done - witness the internal devaluation pulled off in Latvia - but it is a big ask and most people would not be able to tolerate it and most politicians don't have the balls to implement it.
"You may find a long history of economic data at Measuring Worth (http://www.measuringworth.com/datasets/usgdp/result.php).
Over the period 1790-1847 during which the US ran a bimetallic standard and experienced relatively rapid real growth at an average rate of 3.8% per year. The volatility of growth over that period was around 2.5%.
From 1848-1957 a period covering various attempts at Gold Standards, the US grew at around 3.4% per year on average, however, with a far larger volatility of 5.7%.
From 1958-present it has grown around 3.2% per year with a volatility of just 2.1%.
The fact that it grew more rapidly in the 19th century is hardly a surprise, given the expansion and industrialisation of the country, but 3.8% vs 3.2% can hardly be termed "much higher". As for the period covering the Gold Standard, 3.4% is statistically the same as 3.2%, though not with more than double the volatility in output."
Oh, and one final thing from Econbrowser to savour on..."For any of you who still believe that Shadowstats provides the only reliable U.S. inflation data, Paul Krugman supplies an amusing observation. The price of a 2012 subscription to Shadowstats is $175. For comparison, six years ago the price was ... $175."
Return to the gold standard
The
key part
"Last month, the average U.S. wage was up to $19.77 an hour, but the price of gold had skyrocketed to $1623 an ounce. That means that for 100 hours of labor, the average worker today would only receive 1.2 ounces of gold. Here's what average U.S. wages would look like if they were reported in units of ounces of gold earned per 100 hours instead of in the usual units of dollars earned.
"Last month, the average U.S. wage was up to $19.77 an hour, but the price of gold had skyrocketed to $1623 an ounce. That means that for 100 hours of labor, the average worker today would only receive 1.2 ounces of gold. Here's what average U.S. wages would look like if they were reported in units of ounces of gold earned per 100 hours instead of in the usual units of dollars earned.
Under a gold standard, a dollar always means the same thing in terms of ounces of gold that it would buy. So for example, if the dollar price of gold today was the same as it was in January 2000 ($283/ounce), and if the real value of gold had changed as much as it has since then, the dollar wage that an average worker received would need to have fallen from $13.75/hour in 2000 to $3.45/hour in 2012.
And the problem with that is, for a host of reasons ranging from minimum wage legislation, bargaining agreements and contracts, institutions, and human nature, it is very, very hard to get workers to accept a cut in their wage from $13.75/hour to $3.45/hour. The only way it could possibly happen is with an enormously high unemployment rate for a very long period of time. This strikes most of us as a pretty crazy policy proposal."
The Goldbugs conveniently tend to forget the amount of macro-economic volatility embedded in gold-pegged regimes that resulting in very nasty bouts of deflation and unemployment due to its inherent inflexibility. Just witness the Panic of 1907 and the role that seasonal shifts in gold holdings back and forth across the Atlantic had in the run-up to the event.
But then Macroman also put it well here
"The presence of the US's elastic money supply has greatly dampened economic volatility, something that would be greatly amplified by the necessity of pro-cyclical fiscal and monetary policy within the rigidities of a Gold Standard. It is thus far from obvious that the current ability of countries like the US and UK have suffered from having such an economic policy framework.
Those making the calls for a return to the Gold Standard clearly haven't read their history well enough to recall that *all* economic entities suffered from the frequent and severe depressions and financial panics resulting from the lack of a lender of last resort and elastic currency. For all its failings, the study of economics has shown that counter-cyclical economic policies are the most successful way of a) maintaining stable but low inflation [there is a good deal of evidence that low but positive inflation is optimal] and (b) reducing economic and financial volatility. Such a framework is clearly not sufficient, as the excesses of the financial sector over the past decade or so demonstrate, but it is a good place to start, rather than throwing out the hard-won policy lessons of the past 80 years."
I have yet to get round to checking the site mentioned below in the Macroman post but more good nuggets on the inherent inflexibility and thus resulting volatility gold standards bring. Basically, in a liberal democracy implementing the pain that a rigid gold-peg would bring is very tough... not to say it can't be done - witness the internal devaluation pulled off in Latvia - but it is a big ask and most people would not be able to tolerate it and most politicians don't have the balls to implement it.
"You may find a long history of economic data at Measuring Worth (http://www.measuringworth.com/datasets/usgdp/result.php).
Over the period 1790-1847 during which the US ran a bimetallic standard and experienced relatively rapid real growth at an average rate of 3.8% per year. The volatility of growth over that period was around 2.5%.
From 1848-1957 a period covering various attempts at Gold Standards, the US grew at around 3.4% per year on average, however, with a far larger volatility of 5.7%.
From 1958-present it has grown around 3.2% per year with a volatility of just 2.1%.
The fact that it grew more rapidly in the 19th century is hardly a surprise, given the expansion and industrialisation of the country, but 3.8% vs 3.2% can hardly be termed "much higher". As for the period covering the Gold Standard, 3.4% is statistically the same as 3.2%, though not with more than double the volatility in output."
Oh, and one final thing from Econbrowser to savour on..."For any of you who still believe that Shadowstats provides the only reliable U.S. inflation data, Paul Krugman supplies an amusing observation. The price of a 2012 subscription to Shadowstats is $175. For comparison, six years ago the price was ... $175."
As Churchill might have put it, fiat currency is the worst form of money except all the others that have been tried.
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