October 2012

Should We Consider a Return to the Gold Standard?

by John R. Hendrickson

The United States economy is at a perilous crossroads. The future of the economy is uncertain as the “Great Recession” continues. The main reason for the slow substandard economic recovery is the policies emerging from President Barack Obama and Democrats in Congress. These policies have consisted of more government spending and higher levels of taxation and regulation. In fact it has been these policies which are causing continual uncertainty over the economy as businesses and individuals are not sure what the future will be in terms of tax rates, regulatory policies, and the new health care environment as dictated by the Patient Protection and Affordable Care Act. The massive fiscal crisis that our nation faces is also a significant contributor to the uncertainty as well as the recent continuation of the Federal Reserve policy of Quantitative Easing (QE3) or to put it more plainly, inflating the currency.

Fortunately, the solutions to the fiscal crisis are easy, but politically difficult to translate into policy. Policymakers must reverse the current Keynesian-style policies and replace them with traditional limited-government policies. These policies include tax reductions, spending reductions, and emancipating the economy from the regulatory burden. The above policies are both time tested and proven to work in creating economic growth. In addition to these policies serious consideration should be given to returning to a gold standard. The gold standard is defined as “a monetary system in which a nation’s currency is backed by gold, has a standard of value measured in gold, and can be exchanged for gold.”[1]

As a result of the “Great Recession” and the fiscal crisis the discussion over the gold standard has moved from being a topic of minimal concern to being a serious issue of economic debate. In fact the advocates in favor of returning to a modern gold standard are increasing and include many notable economists and policymakers. The gold standard also was an important component of American economic history. Lewis Lehrman, Chairman of the Lehrman Institute and authority on the gold standard wrote:

What lessons might we learn from American financial history? Consider the fact that from 1792 until 1971, the dollar was defined in law as a weight unit of gold (and/or silver). The last vestige of convertibility of the dollar into gold was abolished by President Nixon’s executive order on August 15, 1971.[2]

The renewed interest in the gold standard is especially symbolized by the Republican Party platform’s “call for the creation of a commission to evaluate restoring the link between the dollar and gold…”[3] The last gold commission was initiated during President Ronald Reagan’s administration, which considered returning to the gold standard.

Advocates of returning to the gold standard argue that no monetary system is perfect, and therefore, returning to the gold standard will not create an economic utopia. One of the major benefits of returning to the gold standard is the strengthening of the dollar. David Malpass, President of Encima Global LLC and contributor to The 4% Solution: Unleashing the Economic Growth America Needs, wrote:

Instead of the current weak-dollar policy, which hurts growth by driving investment away from the United States, we need a strong and stable dollar policy. To create such a policy, the president should state that a strong and stable dollar is part of U.S. growth policy and will be implemented by the Treasury and Fed [Federal Reserve].[4]

This is a major concern with not only President Obama’s failed economic policies, but the continuation of the Federal Reserve policy of QE3. History has proven that printing money has dangerous consequences to an economy. “More Fed money won’t increase after-tax rewards for risk, entrepreneurship, business hiring, and hard work. Keeping more of what you earn after-tax is the true spark of economic growth. Not the Fed,” wrote Larry Kudlow, a former Reagan administration official and economist.[5] Kudlow argues that “the Achilles’ heel of the [Fed Chairman Ben] Bernanke plan is the collapse of King Dollar, the result of printing so many new ones for so long.”[6]

Charles Kadlec, a columnist for Forbes, argues that the “gold standard is key to achieving a period of sustained, 4 percent real economic growth.”[7] Under the gold standard “over that entire 179 years, the U.S. economy grew at a 3.9 percent average annual rate, including all of the panics, wars, industrialization, and a myriad of other events.”[8] As Lehrman argues:

Restoration of a dollar convertible to gold would rebuild a necessary financial incentive for real, long-term, economic growth by encouraging saving, investment, entrepreneurial innovation, and capital allocation in productive facilities. Thus would convertibility lead to rising employment and wages…Consider the past decade of hyper-managed paper currencies and manipulated floating exchange rates wherein American annual economic growth fell to an anemic 1.7 percent. Under the classical gold standard (1879-1914), U.S. economic growth averaged 3 to 4 percent annually, the equal of any period in American history.[9]

David Malpass argued that economic growth can be achieved “on the ageless American principles of sound money, low tax rates, and limited federal government…”[10] “Budget reduction, tax cuts, and the gold standard are worth reconsidering as potential remedies to today’s ills,” noted economic historian Amity Shlaes.[11] These were the policies that were central to the economic prosperity of the 1920s under Presidents Warren G. Harding and Calvin Coolidge.

The gold standard is a serious idea that needs to be considered fully by policymakers. A return to the gold standard will result not only in strengthening the dollar, but also bringing stability and certainty back to the economy and in economic policy. The best economic policies are those that are rooted in the Constitution and it is in this tradition that the nation will find solutions to avoid further economic decline.

The issues are serious: high unemployment, dismal economic growth, a $16 trillion national debt with annual trillion dollar deficits, uncontrolled spending and entitlement growth, and the looming tax increases in January 2013. All threaten to sink the American economy. The gold standard is one policy idea that will lead the American economy back into a period of strong economic growth. If elected president, Governor Mitt Romney should follow the recommendation of the Republican platform and initiate another gold commission to reconsider returning to the gold standard.

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in interest of a better-informed citizenry. 

[1] Jack C. Plano and Milton Greenberg, “Gold Standard,” in The American Political Dictionary, 11th edition, Harcourt College Publishers, New York, 2002, p. 435.

[2] Lewis E. Lehrman, “Fight the fiat,” The American Spectator, July-August 2012, <http://spectator.org/archives/2012/08/10/fight-the-fiat> accessed on September 25, 2012.

[3] Charles Kadlec, “The top ten reasons that you should support the ‘Gold Commission’,” Forbes, August 27, 2012, <http://www.forbes.com/sites/charleskadlec/2012/08/27/the-top-ten-reasons-that-you-should-support-the-gold-commission/>  accessed on September 24, 2012.

[4] David Malpass, “Sound Money, Sound Policy,” in The 4% Solution: Unleashing the Economic Growth America Needs, edited by Brendan Miniter, Crown Business, New York, 2012, p. 96.

[5] Larry Kudlow, “Obamanomics has failed dismally,” National Review Online, September 14, 2012, <http://www.nationalreview.com/articles/320904/obamanomics-has-failed-dismally-larry-kudlow> accessed on September 25, 2012.

[6] Ibid.

[7] Kadlec.

[8] Ibid.

[9] Lewis E. Lehrman, “A Road to Prosperity,” The American Spectator, October 2012, <http://spectator.org/archives/2012/09/14/a-road-to-prosperity> accessed on September 18, 2012.

[10] Malpass, p. 107.

[11] Amity Shlaes, “Growth Lessons from Calvin Coolidge,” in The 4% Solution: Unleashing the Economic Growth America Needs, edited by Brendan Miniter, Crown Business, New York, 2012, p.286.