Ramesh Ponnuru, Ron Paul, and the Gold Standard

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.

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About David Beckworth 240 Articles

Affiliation: Texas State University

David Beckworth is an assistant professor of economics at Texas State University in San Marcos, Texas.

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7 Comments on Ramesh Ponnuru, Ron Paul, and the Gold Standard

  1. Why does nobody realize that the fed was established long before the great depression and was literally the direct cause of it?
    Honestly where is all this negativaty on the gold standard coming from?

  2. “Both demonstrate how difficult it is to maintain a fixed exchange rate monetary system”

    It will all work just fine as soon as we allow auditing monetary and fiscal authorities, and exchanges facilitating trade of derivative instruments linked to precious metals. Then let the free market competition do the rest.We don’t necessarily need fixed exchange rate monetary system, just couple of new IFRS/GAAP standards would do.

  3. So let me get this straight, they manipulated the gold standard, therefore they proved that it can be manipulated. And this is an argument to go to a system in which manipulation is the norm?

    In the current system we have arbitrary policy at the whim of a few people within each government. Those few folks are allowed to set rates arbitrarily and spend all kinds of money we don’t have to prop up certain parts of the economy that they deem important. And they do this all the time in both fiscal and monetary policy. Even if you take away the cynicism (realism?) that they will be tempted (HA!) to use this power to protect their own personal economic or political interests, this still implies that our government’s balance sheet is getting worse and worse, and one day it will cause us to either go bankrupt or instead to print more money and devalue our currency — which is arguably even more catastrophic for regular people than government bankruptcy because it turns into a never-ending spiral of wealth destruction.

    So the decisions to manipulate the economy, choose winners, and stack the deck is right now made easy because the hard consequences are in some faraway future. If we make our money sound long-term — as (proper and not manipulated) application of a gold standard might — the decisions to stack the deck become more difficult to make, because they are more difficult to hide. Therefore, it keeps the people in the government (and the fed) honest.

  4. But this article has so little information in it that it can only be taken as an opinion piece. Sure, you could’ve pointed to Austria being on a fixed monetary system in the 1930’s which effectively bankrupted them, making it an easy country to annex for Germany and the third Reich.. but you didn’t.

    Would a gold standard be better than what we have now? Probably, because look at what we have now. Printing money is no better than tying it to a physical asset, in fact, it creates more problems. So yes, a gold standard may not be perfect, but it’s what civilization has used for thousands of years with varying success. Since the fiat system has been implemented, the world has been filled with many more problems, sure that may be my opinion.. but it’s good enough to be a paid journalist on this site..

  5. Ron Paul’s arguements that there was missuse of the gold standard in the 1930’s is absolutly correct and does not compromise his understanding of the subject. the brenton woods agreement saught to set a perminent dollar value to an oz of gold and silver. It also led to the confiscation of private american holdings of gold as well as closing the domestic gold window. This gold window is different from the foreign gold window that president Nixon closed in the 1970’s.

  6. “Would the U.S. political process really be able to tolerate the requirements of a gold standard? I do not see it happening.”

    It’s my understanding that Paul has taken the view these days that the currency’s backing need not necessarily be gold.

    But regardless of whether he proposed a gold standard or a pixie dust standard, the REAL reason you should “not see [this] happening” is that a President Paul could not push his agenda through unilaterally. There would be a healthy amount of resistance. This fact is touted when individuals want to paint a Paul presidency as potentially ineffectual, but then ignored outright when individuals want to present the illusion that at the end of the first year or even a first term we’d be living in Libertopia itself.

  7. That’s not quite the point. Gold is much harder to debase, because it takes actual time and effort to produce more of it. Governments can do funny things with gold, but it is much more difficult to hide the activities as a result of this.

    Additionally, one point on Paul’s monetary platform that nobody else seems to pay any attention to is the removal of “legal tender” laws that prohibit the creation of private currencies to compete with the federal government, whose constitutional role is for the minting of money backed by gold and silver. The competition between private currencies can allow the market forces to finally regain monetary balance; if one monetary standard is found to be failing, it can be instantly replaced by a more trustworthy system before the bust can occur. If people can’t switch away from a falling currency… can you say “Market cycles?”

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