THE NEW YORK TIMES recently ran an article trashing the idea of a return to a gold standard. A growing number of Republicans, including presidential hopeful Senator Ted Cruz, advocate fixing the value of the dollar to gold.
If the purpose of the Times story was to discredit such a possibility before it gained any more momentum, it failed. The piece is actually useful in that it encapsulates some of the egregious myths, misunderstandings and just plain ignorance of what a gold standard is all about.
The purpose of a gold standard is to ensure that a currency has a fixed value, just as measures of time, weight and distance are fixed. We don’t “float” the number of minutes in an hour or inches in a foot. Yet, strangely, economists believe that constantly changing the value of a currency is good for growth.
For a variety of reasons, … gold keeps its intrinsic value better than anything else on Earth. It is to value what Polaris is to direction. The daily dollar price changes in gold reflect changing perceptions in the marketplace about the current and future value of the greenback. Gold’s value is unchanging. …
… Tying money to gold is simply about setting a stable monetary value. It’s a measure. What virtually all economists fail to grasp today is that you can have a gold-based currency without owning a single ounce of gold. Gold is a barometer. We could set the dollar/gold ratio at, say, $1,100 an ounce. If the price rose above that level, it would mean there was too much money in the economy, and the Fed would tighten. If it dropped below, the Fed would ease.