Ramesh Ponnuru has a new article on Ron Paul’s monetary economics. It is a great read throughout that highlights some of the problems with Ron Paul’s views. Among other things, Ponnuru explains many of the well-known problems of the gold standard and its role in making the Great Depression so great. Here is an excerpt (my bold):
Representative Paul’s strategy for dealing with the theoretical and historical arguments against the gold standard in End the Fed is to ignore all of them. All he says is that problems arose in the 1930s because of the “misuse of the gold standard.” But note that the great advantage of the gold standard is supposed to be that governments cannot manipulate it. Concede that they can and the argument is half lost.
That is an important point. If the interwar gold standard did not work because France and United States were not playing by the rules of the game, why do we think countries would be any better behaved today? Would the U.S. political process really be able to tolerate the requirements of a gold standard? I do not see it happening. This is especially true if the gold standard covered an area that was not an optimal currency area. Look no further than the current Eurozone crisis or the UK leaving the European Monetary System in 1992. Both demonstrate how difficult it is to maintain a fixed exchange rate monetary system when internal economic concerns conflict with external ones.