Economic Perspective: Money and Gold

MARY WALDEN:

“Today’s program looks at money and gold. Mike, one of the president’s new nominees for the Federal Reserve Board advocates a return to the gold standard. The U.S. completely went off the gold standard in the 1970s. What exactly is the gold standard, and is it something we should return to?”

MIKE WALDEN:

“Well, for, I would say, up until the mid 20th century most countries were on the gold standard. What that means is that the amount of paper currency that the government issues generally through their central bank, in our case the Federal Reserve, is going to be tied mathematically to the amount of gold that the government has in storage. So this limits how much a government could increase paper currency.”

“And why that’s a good thing, many would argue, is that if a country increases their paper currency too much that’s going to cause inflation. And there’s a lot of data that would support that. So tying your currency to gold is a way of controlling inflation, and I think that might be one of the reasons why this particular nominee is in favor of returning to the gold standard.”

“However, we went off the gold standard, the U.S. did, in the 1970s, and the other factor to take into account, we really haven’t had any problem with inflation since the 1980s. We did have a big bout of high inflation in the 1970s, but really since the early 1980s inflation has been very, very tame. Right now, if you look at the broadest measure of inflation, which includes everything including food and fuel, it’s running about two percent a year. And so many say, ‘Yes, you can limit how much paper currency is being printed if you have a gold standard, but why do we need to go back to that if inflation is not a problem?’”

“The other push back is that during the Great Recession, for example, the Federal Reserve did print a lot of money. Fortunately it didn’t show up in higher inflation, but allowed the Federal Reserve to go in and buy financial assets which many thought stabilized financial markets and prevented the Great Recession from being even greater.”

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.