A viable contender from one of our major political parties wants to take America back to its old money system. Columnist Jon Talton asks: Is the trip worth it?

Share story

Because Ted Cruz could become the Republican nominee and potentially president, we must take seriously his repeated calls to return the United States to the gold standard.

Tying the value of the dollar to gold is an idea dismissed by all mainstream economists. Why? Because this straitjacket proved disastrous in the Great Depression, leading most nations, including the United States, to end the practice. As we just witnessed, the Federal Reserve needs the flexibility to expand the monetary base to fulfill its essential duty as “lender of last resort.”

After World War II, the U.S.-led Bretton Woods System tried a looser gold standard, with exchange rates tied to gold and the dollar. This didn’t work either. After the war, Washington controlled two thirds of the world’s gold. But because it was convertible to dollars, we began hemorrhaging gold to other nations in the 1960s as they recovered and the world economy became more unstable. President Richard Nixon closed “the gold window” in 1971.

Since then the dollar has been the world’s reserve currency with floating exchange rates. It is a “fiat currency,” the bane of gold bugs, because its value is based on the underlying economy and full faith and credit of the federal government.

The nation began with gold and silver as currency, but used a variety of forms of exchange, including bank notes. From 1879 to 1933, it moved to a true gold standard. This was a time of major economic “panics.” Populists favored a more abundant currency based on silver (hence William Jennings Bryan’s famous “cross of gold” speech) rather than the “tight money” of gold.

Gold favored creditors, hurt debtors, widened inequality. It was not especially stable. But worst of all, it prevented the flexibility to fight recessions. No wonder it has been a fringe cause for decades — until now. A gold standard would be even more unworkable, indeed disastrous, in today’s globalized financial system.

If you want a primer on the history of the gold standard, the Congressional Research Service provides a good one. But that’s where this idea should stay, in history.


Today’s Econ Haiku:

Beer duopolies

Aren’t good for competition

Hops across the line