By Louis Golino for CoinWeek ….
As happened four years ago when Ron Paul and other GOP presidential candidates came out in support of a new gold standard–it was even included in the 2012 GOP platform–several candidates have expressed support for the idea during the current GOP presidential race.
Ted Cruz and the gold standard
Candidate Ted Cruz (and as of Tuesday, May 3, former candidate) has expressed greater support for the gold standard than any other hopeful in the 2016 GOP presidential field, stating during several GOP debates that he favors linking the dollar to gold.
For example, on November 11, 2015 he said:
“Instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is, number one, keeping out money tied to a stable level of gold, and number, two, serving as a lender of last resort.”
He added: “Look, we had a gold standard under Bretton Woods, we had it for 170 years of our nation’s history, and enjoyed booming economic growth, and lower inflation than we have had with the Fed now.”
There are a number of problems with these statements.
In addition to the fact that the Federal Reserve on its own lacks the authority to implement a new gold standard, the view of most economists is that, under a gold standard the Fed and the government as a whole would be in a far worse position to manage economic cycles.
Most economists also believe that when it was in effect in this country it was far less beneficial than its proponents believe, noting, for example, that economic volatility and unemployment were higher under a gold standard than under a different regime.
It is true that some economic historians have pointed out that during the gold standard that existed between 1870 and the start of World War I–the so-called classical gold standard period–inflation was low and stable, and international trade and capital flows expanded considerably.
But while that particular gold standard may have been appropriate for the United States at that point in its history (before it became a global power), economists also largely agree that during other stages it was highly problematic–most notably when the stock market and economy crashed in 1929 and the Fed was unable to lower interest rates to get the economy moving because of the gold standard. Besides, in 1933, when the country went off the gold standard, the economy began to recover.
The key problems with the gold standard in general are that it deprives governments of the flexibility needed to adjust monetary policy in response to changing economic conditions; it can result in deflation and economic contractions that destabilize an economy; it limits the ability of the Fed to get an economy out of a recession or depression by lowering interest rates; and under a gold standard, monetary policy is vulnerable to the ups and downs of gold production.
It should also be noted that there are various types of gold standards, not all of which include using some form of gold as currency, and that none of them actually ensure price stability since the value of gold always fluctuates.*
As for the current Fed, inflation in recent years has actually been low (at least as measured by the government) and a much greater concern, especially during the economic crisis, has been deflation, which continues to be a concern in Europe. And to the extent growth is relatively low, that is due to a broad array of factors such as stagnant middle class wages, which have reduced purchasing power for most Americans.
Trump and other GOP candidate views
Returning to the 2016 GOP campaign, Donald Trump has expressed qualified support for the gold standard.
In addition, Rand Paul has supported the creation of a new gold commission to explore whether the dollar should be linked to a hard asset like gold, and Ben Carson questioned the wisdom of artificially printing money and of getting off the gold standard. Also, Mike Huckabee expressed support for tying the dollar to something fixed, though not necessarily gold.
As for presumptive GOP nominee Trump, in a March 2015 interview when asked if he could envision a situation in which the country returned to the gold standard, he said: “Well, in some ways, I like the gold standard. There’s something very nice about the gold standard. And you have to go back at the right time when gold does the old crash-o. But, you know, there’s something very nice about having something solid. We used to have a very, very solid country because it was based on the gold standard. We don’t have that anymore. There is something very nice about the concept of that. It would be very, very hard to do at this point. And one of the problems is we don’t have the gold.”
He went on to explain that other countries have the gold, which appears to be in reference to the moves by China, Russia, and other countries in recent years to vastly expand their gold reserves and gold holdings.
It is also worth recalling that Trump has long been bullish on gold, even accepting gold bars as payment for rent on one of his buildings in September 2011 from APMEX, which was setting up a new office in New York. In addition, throughout the campaign he has voiced support for new tariffs on countries we trade with and for “taking down” the value of the dollar to boost trade, which would likely be bullish for gold.
But at the same time, support for gold as an asset and support for a return to the gold standard, while linked, are not the same thing. As the above statement shows, Trump is actually skeptical about making a new gold standard work while he apparently remains bullish on gold in general.**
Overall, the idea of the gold standard has played a substantially smaller role in the current election cycle that it did in 2012. That is probably related to two important issues: One, the economy is on firmer footing now than it was then, and two, gold has not performed well in dollars over the past four years–with the exception of the past several months, when it has finally appeared to break out of the bear market it’s been in since its peak in 2011.
Role of China
In addition, a key development since 2012 is the enormous increase in the role China now plays in the world economy and in particular in the gold market and gold production, factors which anyone who supports a U.S. return to the gold standard needs to consider.
China is now the world’s largest producer of gold and has one of the largest gold reserves in the world. It also recently launched its own gold exchange in Shanghai and probably more importantly it launched a Yuan-denominated gold fix last month that competes with the London gold fix (which is when the world’s leading banks involved in the gold trade agree on the price of gold each day).
The Chinese gold fix will be set twice daily, similarly to how the London fix works, and it will be based on prices for a 1-kilo contract of gold traded by 18 members of the Shanghai Gold Exchange.
Experts believe that in the short-term the Chinese gold fix would not have a very large impact, but that over time it will, especially as the focal point for the gold market continues to shift from the West to the East. China is clearly using its gold to increase its role in the global economy and is believed to favor some kind of eventual gold-backed currency.
This means that if the U.S. were to reinstate a gold standard of some sort, it would essentially be giving China power over U.S. monetary policies and the American economy, something which people like Trump and the other GOP candidates have strongly opposed when discussing trade and China’s overall economic role.
Beyond their views on the merits of some type of new gold standard, the comments from Cruz, Trump, and other GOP candidates mainly reflect the disdain most Republicans and conservatives have for government intervention in the economy and for the Fed as an institution, which Cruz has called a “series of philosopher kings.”
Cruz, Trump and especially Paul have all voiced support for auditing the Fed.
Comments about the merits of a new gold standard by these individuals reflect in particular the strong opposition of most conservatives to the Fed’s money printing (i.e., three rounds of quantitative easing since the recent economic crisis) and more generally their concern about hyper-inflation, which proponents of gold have argued since 2008 would be the byproduct of all that monetary easing.
But as we know that hasn’t happened. At least so far.
*For more information on the pros and cons of gold standards, see my two previous articles: Should the U.S. Return to the Gold Standard? and Groundwork for Gold-Backed Reserve Currency is Being Laid
**As Trump is now the likely GOP nominee, some analysts have been pointing out that his ascendancy has been one of several factors that have rattled global financial markets (which have been bullish for gold) and if he were elected to office, even greater economic uncertainty and turmoil might lead people to seek the relative safety of gold.