The gold standard delusion
So why is the gold standard a bad idea? Economist Robert Samuelson has
a good summary here, but by far the most important thing to understand is that adhering to the gold standard severely limits government flexibility in responding to what’s actually happening, economically, in the world. The business cycle goes up and down, recessions — and crashes — come and go, and over time, governments and economists have determined that a mix of fiscal and monetary policy can ameliorate the harshest effects of those zigs and zags.
Economist
Barry Eichengreen has famously pointed out that the countries that were the first to abandon the gold standard in the Great Depression were
the first to recover. Those who continued to stay on the gold standard were forced to keep interest rate high in order to maintain their currency’s gold-pegged value. But high interest rates are bad medicine during a recessionary economy. They just make things worse.
A good current example of what happens when you can’t revalue your currency according to the exigencies of the economic climate is offered by Greece. For all intents and purposes, Greece is on the gold standard, aka the euro. It has no executive power to change the value at which its goods and services are sold on the common market. If the drachma still existed, Greece could go through a devaluation that would make Greek products cheaper and more attractive to the outside world, which would in turn boost exports and jobs and allow the economy to grow. Without that option, Greece is stuck with high unemployment and a shrinking economy. Nobody wants to be Greece. Adherence to the gold standard without regard to global economic conditions makes us all Greece.
[continues ...]
