$XAU, $GLD, $USD
President Trump’s plans to nominate Stephen Moore and Herman Cain to the Fed board, and that move points back to The Gold Standard, a policy option once advocated by both men and President Trump himself.
The Big Q: What is the case for returning to The Gold Standard?
The Big A: Is it not a crazy idea, and it fits the preferred political message of today.
Historical data indicates that industrial production volatility was not higher before Y 1914, when the US was on The Gold Standard, compared to after Y 1947, when it mostly was not. And there are similar results for the volatility of unemployment. That is not an argument for The Gold Standard, but it should cause opponents of it to think 2X.
So, whatever the imperfections of a gold standard might be, monetary authorities make a lot of mistakes, too.
So, in the broad historical context The Gold Standard does not look so bad.
The age of The Gold Standard, the 19th Century was largely one of peace and economic growth, running from Y 1815 until World War I.
The fiat (paper) money era that followed was a disaster, as the 1920’s brought monetary chaos, competitive devaluations, and even some hyperventilation and deflation, a few of which were driven by the desire to restore the old Gold par at incorrect rates. It would have been better had the world managed to keep its Gold-centered monetary order of Y 1913.
The Bretton Woods arrangement, which has a good record in terms of stability and growth, involved Gold convertibility, albeit with no domestic convertibility and lots of pressures to discourage actual conversion from foreigners.
Once the tie of USD to Gold broke entirely with President Nixon in the early 1970’s, inflation and interest rates were high and again monetary chaos followed. From the vantage point of Y 1979, some form of Gold standard really did seem better.
What was not obvious then was that monetary policy was going to be so good and so stable for the next 40 years even with all of the Fed’s mistakes.
Fast forward to today’s case for The Gold Standard.
It is based on the view that these recent decades of good paper money management are a historical outlier and cannot be sustained.
Governments have a long history of interfering with Gold standards. So it does not remove politics from monetary policy, and many economists believe that central bank governance can do a better job than a Gold-based system that can create deflationary pressures.
And now it is reasonable to be concerned that some of these governments will seek to monetize their debts and move toward excessively easy money.
That brings us back to the argument in favor of a Gold standard: President Trump.
We all are aware that there is a preference for the price of the USD to be tied to GDP rule, they irony is this: At the end of the day, the advocates of The Gold Standard, and their presence on the Fed Board, are the best argument for the coming Gold Standard.
Making and Keeping America Great!