The gold standard got a bad reputation after the Great Depression, when it was seen as contributing to worldwide deflation. Kurt Schuler points out that the interwar gold standard didn’t follow the rules of the game, which is true. Central banks hoarded excessive gold and that contributed to the deflation. But at the end of the day I still have two major objections to returning to a gold standard. If a gold standard requires good behavior by governments, then why not adopt fiat money? And even if the gold standard were run according to the playbook, the recent dramatic increase in Asian gold demand would have inflicted deflation on any country with a currency linked to gold. Here’s Ramesh Ponnuru making these two arguments in the National Review:
The doctor’s prescription is as mistaken as his diagnosis. The drawbacks to a gold standard are well known. If industrial demand for gold rises anywhere in the world, the real price of gold must rise “” which means that the price of everything else must drop if it is measured in terms of gold. Because workers resist wage cuts, this kind of deflation is typically accompanied by a spike in unemployment and a drop in output: in other words, by a recession or depression. If the resulting economic strain leads people to fear that the government may go off the gold standard, they will respond by hoarding gold, which makes the deflation worse.
If another country’s government begins hoarding gold, the same thing happens. This is not a theoretical concern: It’s what France did in the early years of the Great Depression. Countries were forced off the gold standard, and recovered in the order they left it. Representative Paul’s strategy for dealing with the theoretical and historical arguments against the gold standard in End the Fed is to ignore all of them. All he says is that problems arose in the 1930s because of the “misuse of the gold standard.” But note that the great advantage of the gold standard is supposed to be that governments cannot manipulate it. Concede that they can and the argument is half lost.
The biggest net hoarders of gold in the late 1920s and early 1930s were the French. Some of those gold hoards recently fell on the head of a French construction worker. Check out this link, and recall that these bags of gold were one of the primary reasons the Nazis took power in Germany. That’s not to say the historical gold standard was all bad; it’s not clear any alternative system would have worked better between 1815 and 1914. It may have been a useful step in the evolution of money. But by the interwar years it was more a hindrance that help to policymakers.
PS. Kurt Schuler points out that Ron Paul wants to abolish the Fed, which means he favors a gold standard less susceptible to interventionist monetary policies. But even prior to the Fed the US government held large monetary gold stocks. So even in a Fed-free world, governments had some ability to intervene in the gold market.