Jonathan B. Wight

A few acquaintances espouse the idea that a gold standard is simple, would reduce inflation, and would force the government to live within its means.

A lot of attention in particular is being paid to Paul Ryan's manifesto against the Federal Reserve and in favor of some type of commodity standard (for example, here and here). The 2012 Republican platform explicitly proposes a commission to investigate ways to "set a fixed value for the dollar" – which is code-speak for a gold standard.

Paul Ryan said in a speech that he gets his anti-Fed views and pro-gold views from reading Ayn Rand's novel, Atlas Shrugged: "I always go back to, you know, Francisco d'Anconia's speech, at Bill Taggart's wedding, on money when I think about monetary policy."

So what's wrong with the gold standard? Well, what's wrong in general with technology from the 1800s? Do you want to live without electricity, cars, and antibiotics? All of these innovations improve on the natural state of things. Electricity allows us to live full lives even when the sun goes down and greatly increases our productivity.

What would you think of a presidential candidate who said, "Sunlight is our natural way of seeing. We should return to the sun standard." You would say this person is nuts!

I would say the same thing about Ryan's view on the gold standard. It's a relic of a bygone era. The gold standard cannot provide either price or employment stability for reasons well covered by many notable economists, and as reflected by price and output data from the times we were on the gold standard. As Krugman wryly notes:

"Under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933."

That would be funny, except that proponents of the gold standard seem to systematically ignore the downsides of a metallic monetary system. This isn't a mistake Milton Friedman would make.

Today we buy cars whose most expensive materials are no longer metal. A modern car is made up of expensive composites, and plastics, and electronics. Today, a modern monetary system is made up of electronic and other assets that constitute the means of exchange, stores of value, and units of account. It's a more complicated and flexible monetary system, to be sure, than the money of old, just as cars today are vastly more complicated and supple than the Model-T.

Would you want it any other way? Is simple always better?

[Updated September 28, 2012 to fix links.]