Should the United States Return to the Gold Standard? N ° – InsideSources


Editor’s note: For another point of view, see COUNTERPOINT: Is the gold standard the punch bag of economists?

Fifty years ago, next month, as inflation rose and trade deficits rose, President Richard Nixon suspended the conversion of the US dollar to gold. This move effectively ended the Bretton Woods system – the latest attempt at an international gold standard – and ushered in a new era of floating exchange rates between major currencies, rather than rates set by policymakers.

The end of gold-backed currency and fixed exchange rates has been controversial, but it remains the right decision.

Former congressman and presidential candidate Ron Paul has decided to enter first political because of his disappointment with Nixon’s decision. Some commentators have argued that floating exchange rates are a major source of instability and seek a return to some sort of Bretton Woods arrangement. Many argue that as rules-based monetary policy, a new gold standard would prevent central banks (including the Federal Reserve) from creating inflation and budget makers (including Congress) from creating unhealthy budget deficits.

While central banks should take a more responsible, rules-based approach to monetary policy, a new gold standard would do far more harm than good.

In 1944, representatives of the Allied Powers developed Bretton Woods for the postwar period. Their aim was to create a regime that produced exchange rate stability in a tumultuous world, while also giving each country’s central bank the latitude to pursue its own policies.

The dollar was pegged at $ 35 per ounce of gold. Other currencies, such as the British pound and the German mark, were pegged to the dollar, but these indexations could be adjusted. It took almost 15 years for the system to work, and even then it suffered from major flaws that gave it a short lifespan. For example, in 1967 the UK struggled to maintain its foothold, so it devalued the pound. This boosted exports, but also increased inflation.

The challenges in the United States ultimately led to the demise of Bretton Woods. Large trade deficits with West Germany and Japan and large budget deficits under the Johnson and Nixon administrations have led to more US dollars held abroad. Finally, there was not enough American gold to redeem those dollars. Recognizing this, speculators sold their dollars, causing currency “rushes” and making it even more difficult for the United States to maintain its exchange rates with other countries. Nixon suspended the conversion of the dollar to gold, and although he announced that the suspension would be temporary, the system was never saved.

While it can be argued that Bretton Woods used an ill-conceived gold standard – giving governments too much leeway to pursue monetary and fiscal policies and creating tensions within the system – that doesn’t mean we should go back to another gold standard, even one like the relatively good-functioning Classic pre-WWI gold standard.

The classic gold standard era was a time when central banks did not exist or had much less discretion, prices were more flexible, and the public did not expect governments to provide services. modern social. These conditions simply do not exist today.

In at least some ways, central banks are already moving towards a more rules-based monetary system. From the 1990s, many began to aim for 2% inflation, and inflation since then has been generally low in the developed world (the recent rise despite). Last year, the Fed changed that target by targeting 2% inflation on average over time, which means making up for past failures of the target.

One same best goal would target total dollar spending in the economy, or nominal gross domestic product. One of the differences with this approach is that it allows inflation to rise temporarily in response to recessions. This reduces the severity of the debt burden and stimulates the recovery of the economy. It also allows inflation to fall during economic booms, thereby helping consumers. In addition, the targeting of nominal gross domestic product can be rule-based, making the policy more predictable and more restrictive.

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