Monday, April 22, 2019

Would Returning to Gold Standard Benefit the Middle Class?

Of course!

Judy Shelton writes in The Wall Street Journal:
Fed Gov. Lael Brainard, who was appointed by President Obama, told Bloomberg Television last week that new Trump administration nominees will be expected to put forward “fact-based, intellectually coherent arguments that are based on evidence, that are consistent over time” to participate meaningfully in the Fed’s deliberations.

She’s certainly right that the Fed should act based on the best studies and evidence. It could start with the 2011 paper “Reform of the International Monetary and Financial System,” published by the Bank of England, which analyzed the performance of the gold standard (1870-1913) and the Bretton Woods gold-exchange system (1948-72) relative to current monetary practices. The report concludes that today’s system has performed poorly relative to prior monetary regimes, “with the key failure being the system’s inability to maintain financial stability and minimise the incidence of disruptive sudden changes in global capital flows.” Trade and investment flows are distorted as the world’s major central banks engage in subtle exchange-rate competition.

The discussion might be further enriched by the Obama administration’s 2015 Economic Report of the President, which highlights the growth in middle-class incomes during the Bretton-Woods system of fixed exchange rates. The report describes the period from 1948 to 1973 as the “Age of Shared Growth.” The period was characterized by accelerating labor productivity, falling income inequality, and increased workforce participation. What if post-1973 productivity growth had continued at its pace from the previous 25 years? The report posits that “incomes would have been 58% higher in 2013” and “the median household would have had an additional $30,000 in income.”

The kind of economic growth that increases living standards across all income levels occurs under conditions of monetary and financial stability. Money is meant to serve as a reliable unit of account and store of value across borders and through time. It’s entirely reasonable to ask whether this might be better assured by linking the supply of money and credit to gold or some other reference point as opposed to relying on the judgment of a dozen or so monetary officials meeting eight times a year to set interest rates. A linked system could allow currency convertibility by individuals (as under a gold standard) or foreign central banks (as under Bretton Woods).
Periods of aggressive Federal Reserve money printing always benefit those that are asset holders--not the middle class or the poor. Some great wealth is the result of providing superior goods and services to consumers but a lot during a period of monetary inflation is the result of the inflation.

The return to a gold standard would halt or slow down Federal Reserve money printing antics. It would certainly help the middle class and poor, who are always the last to get newly printed Fed money.


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