Included in the Republican National Convention's official platform is a call to examine the feasibility of returning the US to a gold standard, a system by which the US dollar would be fixed to some quantity of gold, rather than what it is now, fixed to nothing.
We can safely say there's zero chance that Mitt Romney will preside over a return to this system, but there is a distinct faction within the GOP that sees eliminating our current system of fiat money and establishing a system of hard money as a major policy goal.
This was the bedrock of the Ron Paul campaign. Influential conservatives like Larry Kudlow and Steve Forbes have championed the same thing. Even Paul Ryan has in the past favored some kind of hard money alternative to the current monetary regime.
Naturally this minor bone being tossed to the party's gold wing has been the subject of (well deserved) mockery.
Paul Krugman said in a post that the gold standard would destroy the economy, and he pointed out that under a gold regime, the US had financial panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.
In The Atlantic, Matthew O'Brien wrote that the the gold standard could be shown to be the 'World's Worst Economic Idea' in just 2 charts.
The first chart shows the CPI during June 1919 to March 1933. The CPI swings wildly.
The second chart show the CPI these days.
The swings are far more modest.
So the gold era is characterized by deeper price swings, and more crises.
What, then, is the appeal?
It's actually pretty simple. The ability to create fiat money out of thin air is a stealth form of taxation, because the creation of more dollars diminishes the value of those already in existence. Conservatives have a constitutional opposition to taxation, ergo a system of money that makes it hard to create more money is pretty logical.
What's below isn't the prettiest chart in the world, but you can see the connection between the growing deficit (red line) and the value of the dollar (blue line). For the most part, bigger deficits (i.e. the creation of more money) is a depressing factor on the dollar.
The idea of inflation being a substitute for taxation is pretty straightforward.
Evan Soltas had a post back in June pointing out that back in the day, the Greek government financed itself via inflationary monetary and fiscal policy, with nosebleed CPIs back in the day.
That's because then as now, Greece has never really had the institutional ability to collect taxes.
In the late 90s, the government brought in "Tax Rambos" from the US IRS to teach Greek bureaucrats how to collect taxes, but it never really worked. So without steady tax revenue, Greece had only one alternative: create money.
Inflation was high, but it wasn't an economic catastrophe. Unemployment in Greece was, for a long time, pretty much the same as unemployment in Germany.
Of course, the two rates changed markedly in 2008, when the Greek sovereign debt crisis hit, and for the first time, Greece was faced with a recession where it didn't have the inflation tool. It still hadn't built up a tax collection infrastructure, but now the old escape valve of creating fiat money to settle bills was gone.
Greece found itself on a de facto gold standard (a rigid monetary system that put the government in fiscal handcuffs) and the result has been a failure of historic proportions, rivaling the US back when it was on a hard money standard during the Great Depression.
So gold really is a terrible idea that's associated with economic calamity, but it does prevent the government from engaging in a form of taxation, and that's why conservatives like it. And based on what we saw during the 2011 debt ceiling fight, there is a wing of conservatives that's willing to chance economic calamity to prevent any kind of budget deal that involves higher taxes.
* Real quickly, we wanted to address a good post by John Carney at CNBC, who says it's a myth that advocates of the gold standard are motivated by a desire to see price stability. He cites the work of the economist Murray Rothbard.
"Far less controversial is the fact that more and more economists came to consider a stable price level as the major goal of monetary policy. The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the Great Depression caught them completely unaware,” Rothbard wrote in "America’s Great Depression."
While that is intriguing, Rothbard's view is not anywhere near the mainstream of the pro-hard money crew these days. And that crew explicitly makes the point that gold is about price stability.
Ron Paul -- who is undoubtedly one of the most influential monetary policy thinkers on the right, and arguably the entire world -- recently made a big point about how a silver coin always bought the same amount of gasoline.
It's a popular line among gold fans that a gold coin back in Roman days would buy you one toga, and that same gold coin today would buy you a nice men's suit. Voila: Price stability.
Steve Forbes has advocated for gold on a stability message.
These are the big names that are pushing for gold these days, and they're hammering an idea about price stability that doesn't exist.
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