Why Some Call Return to Gold Standard ‘Ludicrous’
The Republican Party’s idea to relook at the gold standard is ludicrous and nonsensical, and is simply a plan put forward by the political opposition to score points, according to analysts.
The Financial Times reported on Friday that the Republican Party plans to set up a commission to look into re-establishing the link between the dollar and gold as part of its platform to be unveiled at the party convention in Tampa Bay, Fla., next week.
But analysts told CNBC that the idea would not work.
“I think it’s absolutely nonsensical,” Moorad Choudhry, head of treasury at the corporate banking division of the Royal Bank of Scotland told CNBC Friday. “There’s a very good reason they unhooked it in 1971, because their deficit didn’t enable them to maintain it with the supply of gold. In fact, is there enough gold in the world to back the U.S. debt?”
U.S. federal debt grew to $15 trillion at the end of 2011 from around $400 billion in 1971.
The Richard Nixon administration originally broke the link between gold and the dollar in the early 1970s amid surging inflation (learn more), rising costs from the Vietnam War, and an oil crisis.
Before that, fixed amounts of gold were directly convertible to the U.S. dollar and vice versa. That meant money supply theoretically was limited by the amount of gold backing it, and exchange rates were based on the difference in price for an ounce of gold between the dollar and a foreign currency.
“The idea for the U.S. economy is fiscal retrenchment, but it isn’t the gold standard,” Choudhry said, adding that the U.K. tried the same idea in the 1920s to no avail.
“The U.S. deficit since 1971 is exponentially greater in size and it’s not possible now, whether you want to fight inflation, whether you want to fight fiscal control, gold standard is not the answer.”
Ralph Silva, director at Silva Research Network, told CNBC that when politicians were in opposition they could say “some ludicrous things.”
“Back in the ’50s and before that, when you were making economic decisions on a quarterly basis you could move slowly. You’ve got to make decisions on a quarter-of-a-second basis here, and having a gold standard doesn’t allow you to make those changes as quickly,” he told CNBC Friday.
Silva said however that a gold standard would benefit Canadian and South African gold miners, as there simply wasn’t enough of the commodity available to back the money supply.
But the proposal may not come to much. In 1981, for example, former U.S. President Ronald Reagan created a “gold commission” which decided not to go back to the gold standard.
Mary Jo Jacobi, former special assistant to President Reagan and Assistant U.S. Secretary of Commerce for President George G.W. Bush, told CNBC that a lot of the Republican Party faithful are keen to look at the adoption of the gold standard.
However, she couldn’t confirm it was an idea put forward by Mitt Romney’snewly announced running mate, Paul Ryan.
“As I understand it there is an ‘audit the Fed’ plank in the Republican platform that was drafted yesterday,“ she said, suggesting that the GOP are planning to scrutinize the U.S. Federal Reserve (learn more) as a key part of their election manifesto.
“What the commission will be able to do is look at all of the issues big and small,” she said. “Utah accepts gold now as a medium of exchange, so what do you do about all the gold that’s out there when you have the federal government, the central bank holding it?”
Jacobi accepted that in the short term a return to the gold standard would be highly destabilizing, despite it being designed to naturally control government spending. She also conceded that in the short term it may mean more volatility and unemployment (learn more), as the central bank wouldn’t be able to vary interest rates in certain situations.
Both analysts, Choudry and Silva, said the key goal for the U.S. should be fiscal discipline with the economy set to be the key issue in this November's presidential election.
“I’m always intrigued how (Paul Ryan’s) prescription for cutting public expenditure looks at things like medical care and things like that, not at say the defense budget,” Choudhry said.
“You could pull out of Afghanistan and save yourself a few hundred billion dollars a year. We didn’t have to fight wars through the last ten years and spend maybe a trillion on that.”