Thursday, August 30, 2012

The Republican Party Platform, the Gold Standard, and Alan Greenspan

The Republican Party Platform contains a plank concerning a possible return to the gold or other metallic standard (silver?) that probably no one who holds or is likely to hold a responsible policy position on monetary issues in the Administration or at the Federal Reserve, no matter which political party is in power, takes very seriously.

The relevant paragraph of the platform states: "Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar."

I remember the Gold Commission of the early 80s.  I was working at the Treasury Department in Domestic Finance and among my responsibilities was analyzing proposed new debt instruments.  It was never in much doubt that the Gold Commission would not recommend reestablishing the gold standard, since its composition guaranteed that result.  Its chief purpose was political -- to placate supply-siders, some of whom were also enamored with gold.

Of interest to me was a private sector consultant who recommended that the Treasury issue notes indexed or backed by gold (I believe the recommended maturity was five years).  He claimed that the Treasury would save money by issuing such notes and that it would be a first step to establishing the gold standard.  He not only made this recommendation to the Gold Commission but also wrote an op-ed article on this subject for the Wall Street Journal.  Treasury staff, including me, did not agree that gold-backed notes would save the Treasury money, nor did we favor restoring the gold standard.  With respect to the saving money argument, among other counterarguments, we could point to the disastrous experience of the French government, which issued gold indexed notes under President Giscard d'Estaing.

The private sector consultant was, of course, Alan Greenspan, whom President Reagan later appointed as the replacement to Paul Volcker as Chairman of the Board of Governors of the Federal Reserve System.  There  is no evidence he ever changed his mind about the gold standard; I remember reading an article quoting him as saying he was probably the only economist at the Fed who held this opinion.  Greenspan was, though, politically savvy and he knew better than to push this idea.  

Perhaps Greenspan was still under the influence of some of the ideas to be found in Ayn Rand's Atlas Shrugged, but it is difficult to find many economists, whatever their political preferences, who support a return to the gold standard.  The Republicans probably included this plank as a supposedly harmless way to placate Ron Paul supporters, but it is not encouraging that one of the two major U.S, political parties is flirting with a return to the monetary arrangements of the 19th and early 20th centuries.

As for Greenspan, his luck ran out.  He was at one time praised as perhaps the best central banker ever; I think even Alan Blinder may have said that at one point.  At this point, it looks like the judgement of history will not be that favorable.

1 comment:

  1. The maestro wasn't just a consumer of the Russian atheist Ayn Rand's novels such as Atlas Shrugged, he was an actual cult member. She referred to him as: The Undertaker. Sort of appropriate given the role he played in burying our economy. On September 15, 2008 the entire financial system collapsed for the first time since October 1929-that's 78 years and 11 months.