GOP spinning golden oldie

Opinion: August 31, 2012 at 12:00a.m.

By Richard S. GROSSMAN

Los Angeles Times

The Republican Party platform calls for the creation of a commission to look at restoring the link between the dollar and gold.

As an academic, I am all in favor of scientific study. But in this case, a call for further study is just code for “This is a bad idea, but let’s try it anyway.”

The gold standard’s shortcomings should be obvious by now, but apparently the Republican platform committee — seeing the gold standard as a bulwark against a nonexistent inflation problem — needs a refresher course.

If the United States established a gold standard, the Federal Reserve would be required to exchange dollars for gold at a fixed price.

But what price? During the last 10 years, gold has fluctuated between $300 and $1,900 per ounce. Set the price too low and the Fed will run out of gold in a matter of hours; set it too high and the Fed will be flooded with gold. And even if Congress could find the “correct” price for gold, given worldwide fluctuations in the demand for gold, it is unlikely that the price would remain “correct” for long.

History provides ample evidence that the gold standard is a bad idea. After World War I, the major industrialized nations established the gold standard, which is widely seen as having contributed to the spread and intensification of the Great Depression. The gold standard tied the hands of monetary policymakers, forcing them to maintain high interest rates in order to maintain the price of gold, thereby making a bad economic situation even worse.

Had we been on the gold standard when the subprime crisis broke, the Federal Reserve would have had to raise interest rates instead of lowering them. Given that our economy was — and still is — struggling despite historically low interest rates, higher interest rates would have been devastating.

And if there is any doubt about the folly of tying the value of a currency to something outside a nation’s control — and the price of gold is well outside the control of any government or central bank — look to Europe.

The euro

Instead of fixing their currencies to gold, the 17 members of the Eurozone fixed their currencies to a new currency, the euro. The euro worked well during its first decade, primarily because there were few strains on it. But starting in 2009, the stress became obvious: Greece had fiscal problems, Ireland and Spain had real-estate bubbles that burst, Portuguese consumers spent themselves into trouble, and Italy’s economic policy was a complete mess.

If these countries had not been members of the Eurozone, they could have instituted expansionary monetary policies that would have helped their economies, such as devaluing their currencies to increase exports or lowering interest rates to stimulate economic growth. Instead, countries as diverse as Greece and Germany are stuck with the same monetary policy — and it is not working well for either of them.

The Republican Party proclaims itself the party of conservatism. But being a conservative should not mean promoting policies that have not worked for 100 years.

Richard S. Grossman is a professor of economics at Wesleyan University in Middletown, Conn., and a visiting scholar at the Institute for Quantitative Social Science, Harvard University. He is the author of “Unsettled Account: The Evolution of Commercial Banking in the Industrialized World Since 1800.” He wrote this for the Los Angeles Times. Distributed by McClatchy-Tribune Information Services.