David Frum


Should America Return to a Gold Standard?

Not unless a host of conditions can be met, says AEI scholar John Makin. I've emphasized a line in the quote that explains why.

[I]n the absence of a hegemonic financial power, like Britain before WWI and the US after WWII, that is willing and able to peg its currency to gold, it is difficult to see how a modern gold standard would evolve and function. The gold standards like those in place during the late nineteenth century can deliver relatively stable prices, and perhaps falling prices if the supply of gold does not rise rapidly enough. But it also delivers high volatility in real output and tends to be associated with more financial crises. Like it or not, the modern world has grown used to central banks that aim at price stability and full employment and provide an elastic currency in an effort to achieve higher growth while avoiding financial crises.

If there is a gold commission after this year’s election, it will probably discover—like the gold commission after the 1980 election did—that a unilateral American move toward a gold standard is not feasible at this time. That said, if a widespread episode of high inflation emerges in coming years, an international consensus may develop for a need to return to a more stable monetary system anchored to gold—a tall order in a world where no hegemonic country exists to peg its currency to gold and provide a benchmark for price stability for other countries.

Even the post-WWII Bretton Woods system broke down when the international reserve role of the dollar tied to its link to gold enabled the United States to run overly expansionary policies that eventually created inflation that eroded confidence in the dollar pegged to gold. The ease with which the US government brushed aside that link does not instill confidence in the durability of a new system that depends on a credible peg between gold and a major currency like the dollar.