by Steven Horwitz
In Friday’s Washington Post, Ezra Klein raises a number of criticisms of the gold standard using as his hook the call for a new Gold Commission that appears in a draft of the new Republican Party platform. Putting aside the question of party politics and what a new Commission might do, Klein’s arguments against the gold standard are not as strong as he thinks. I want to respond to three of them here, and in reverse order of importance.
He argues, as many do, that tying the dollar to gold means that the value of the dollar will vary with the “global price of gold as opposed to the needs of our economy.” There are several problems here. First, are the fluctuations in the price of gold any greater than the current factors that affect the value of the dollar, including changes in the judgment of Federal Reserve officials and the politics of money creation? In fact, one could argue in response that the major cause of fluctuations in the price of gold is the very fact that the Federal Reserve has discretion over the money supply and thereby affects inflationary expectations, which in turn destabilize the price gold. The variance in the price of gold is not exogenous to the monetary regime. In other words, a gold standard might dramatically reduce the variance in the price of gold, avoiding the problem Klein raises.
And does Klein really believe that the Fed currently adjusts the value of the dollar according to “the needs of our economy?” Is the Fed totally immune from political concerns? Does the geo-political situation matter not at all for its decisions? We have some evidence of political business cycles, which suggests that the Fed is hardly pure in its intentions. Klein commits a version of the Nirvana Fallacy by setting up his comparison as that of an imperfect gold standard versus an idealized Fed.