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Back to a Gold Standard?

Here's a piece I did for the New York Times Room for Debate on whether we should return to the gold standard:

Gold During the Depression, NYTimes: Mark Thoma is an economics professor at the University of Oregon.
The ability of countries to use monetary policy to address domestic problems depends upon whether they have a fixed or floating exchange rate.

Under floating exchange rate systems, each country has the ability to set domestic monetary policy independently. However, in fixed exchange rate regimes -- as when the value of the domestic currency is fixed to the value of gold -- countries lose the ability to pursue domestic monetary policy. This is because any attempt to change the money supply to ease domestic economic problems would cause the value of the currency to change relative to gold.

Since the money supply cannot be manipulated at will, an advantage of a gold standard is that it insulates countries from inflation due to excessive money growth â€" a helpful constraint for countries with a history of inflation problems. The disadvantage is that monetary policy would no longer be available as a stabilization tool. Countries are forced to increase their reliance on fiscal policy, which can create its own problems.

The experience of the Great Depression shows that the loss of the use of monetary policy as a stabilization tool can be quite costly. In the 1930s, the countries that abandoned their commitment to the gold standard had much better outcomes than countries that kept the value of their currency fixed in terms of gold. In addition, historical experience with the gold standard shows that both inflation and deflation will still occur because variations in the supply and demand for gold will alter the price of gold relative to other commodities.

So the cost of giving up monetary policy is high while the benefits from price stability are not very large. So why does Robert Zoellick suggest "employing gold as an international reference point of market expectations about inflation, deflation and future currency values"? Since the gold standard is a proven bad idea, I am going to give him the benefit of doubt and assume he has something else in mind â€" perhaps Jeffrey Frankel's interpretation is correct. But whatever he is suggesting, returning to the gold standard is not a policy we should pursue.

There are several more responses here from from Jeffrey Frankel (Harvard), Simon Johnson (MIT), James Hamilton (UCSD), Douglas Irwin (Dartmouth), and Russ Roberts (George mason).
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