At a campaign event on Wednesday, Jeb Bush was asked whether we should return to the gold standard. “I don’t know,” he replied, before clarifying that “I don’t think so,” but then concluding that “I don’t know for sure.”
This was not the right answer. The right answer would have been that the gold standard was a “barbarous relic” even 80 years ago, and might be the world’s worst idea today.
Now, the problem with the gold standard is that the price of gold doesn’t always go down when economic growth does. In fact, sometimes it does the opposite. Why does that matter? Well, the gold standard says that the dollar will always be worth a certain amount of gold. But that alone isn’t enough to make it true. The Federal Reserve has to do that. So, for example, think about what would happen when the price of gold “wanted” to go up. That is, when supply and demand would make its price go up if it were allowed to do so—which it wouldn’t be under the gold standard. In that case, the Fed would have to make the dollar go up instead to keep the relationship between the two the same. And making the dollar go up is just another way of saying that it makes interest rates go higher, since more people will want to hold a currency that pays more in interest.
The question, then, is when gold actually does “want” to go up. And the answer is not when the economy would want it to. That’s because the price of gold doesn’t go up when the economy is overheating, and down when it’s cooling off. If it did, then the gold standard would give us high interest rates when we needed them, and low interest rates too. No, gold prices depend on inflation-adjusted interest rates. When those are negative, gold shoots up since the money you are effectively being paid to borrow offsets the money you have to pay to store it. So when is that? Well, when interest rates are high but inflation is higher still, like the 1970s, or when inflation is low but interest rates are lower still, like today. In other words, gold goes up during both an inflationary boom and a deflationary bust.
That is not a good thing. Think about it like this. In the first case, we would want the Fed to suffocate the economy by raising rates until inflation was whipped. But in the second, we would want the Fed to revive it by keeping rates as low as possible and maybe even printing money. The gold standard, though, can’t distinguish between this 1970s-style stagflation and 1930s-style collapse. So if we’d had it during the crisis, the gold standard would have forced the Fed to raise rates rather than cut them like it did. In that case, our Great Recession really might have been a Great Depression. That, after all, is how it happened in the 1930s. Back then, the Federal Reserve actually raised rates in the middle of a bank run because that is what it had to do to keep the dollar on the gold standard. The result was that the financial system collapsed and the rest of the economy did too, or at least the parts that hadn’t already. Not exactly history we want to repeat.
Except that some Republicans are flirting with the gold standard. The fact that the gold standard would prevent the Fed from fighting recessions is a feature, not a bug, for conservatives of a certain bent. They appear to think that is just another example of activist government, which the economy would be better off without. They also believe that money should be immutable, like gold, and not something the government creates. That is why Republicans included a gold standard commission in their 1980 platform, again in 2012, and are still talking about it today. Ben Carson, for one, is upset that the dollar is “not based on anything” since we left the gold standard. “Why,” he asks, “would we be continuing to do that?”
Bush, though, is supposed to be the candidate of serious policy. He is supposed to know that there is a reason we don’t use the gold standard anymore, namely that we tried it, and it failed. If you don’t know that, you’re going to have trouble creating any percent growth, let alone 4 percent.
The gold standard will not make America great again.