SUBRAMANIAN: Why switching to gold will not solve our economic problems
Column: Whadda I Know
Inflation: Most people in the U.S. are familiar with the term. To them, it means that there is an overall increase in the prices of goods. The inflation issue became prominent in 2022, when the inflation rate was 8 percent.
Since then, many consumers have predicted that inflation will get worse. A survey by the University of Michigan showed that since 2020, consumer expectations regarding inflation have generally increased, which has caused multiple ideas to be proposed. One of the most prominent of those has been the return to the gold standard.
What exactly is the gold standard?
"The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold," according to Nick Lioudis, the content manager at Chartbeat.
The idea is that the government would set a fixed price for gold and tether the nation's currency to the amount of gold it has. This contrasts the system that is currently in place, which is fiat currency and does not tether currency to anything outside the government.
Many proponents, especially in Libertarian circles, argue that returning to the gold standard could fix problems with inflation. For example, former Rep. Ron Paul (R-Tex.), a prominent voice in the Tea Party and the Mises caucus, believes that the gold standard can be a way to reduce inflation by not relying on the Federal Reserve or other government institutions to be the deciders of the money supply.
The impact of this idea has played a significant role in politics. Last month, Rep. Alex Mooney (R-W.Va.) introduced the Gold Standard Restoration Act, which would reimpose the gold standard. The bill has gained enough recognition that as of this week, the Gold Standard Restoration Act was the fourth most-looked-at bill, according to Congress.gov.
But reimposing the gold standard would not fix inflation or any other economic issues plaguing the world. In terms of inflation, any gold standard proponents argue that pegging the dollar to a gold standard would reduce the fluctuations in the dollar value caused by the reckless printing of money. This view is flawed, though, because the value of gold fluctuates.
There have been quite a few dips and spikes in the price of gold, according to the CBOE Gold ETF Volatility Index, a measure that looks at the fluctuations in gold prices. Thus, claiming that having a gold standard would lead to price stability is unfair.
Even looking at items measured with gold proves that those items do not achieve price stability. For example, when crude oil was measured with troy ounces of gold, the prices continued to fluctuate. This indicates that gold, like any other commodity, is subject to standard fluctuations and is not necessarily stable.
Not only does the gold standard not fix economic issues, but it can also cause far more problems. One of the biggest problems with the gold standard is that it can cause gold hoarding, as can be seen from case examples from France during the 1920s.
During this time, the world was under the Bretton Woods System, which sought monetary stability by instituting a gold standard on the U.S. Dollar and tying other foreign currencies to the dollar. Before the Great Depression, France started hoarding more gold, which increased its share of world gold reserves from 7 percent to 27 percent.
This caused other nations to have shortages in their gold reserves, leading to deflationary pressures (since the lack of currency circulation could not happen), ultimately slowing down economic activity. Because other world currencies were tied to the U.S., what could have been an economic crisis in one nation soon spread to the rest of the world.
If it were the case that the U.S. went back to using the gold standard, this could likely cause a potential gold-hoarding race in other nations, making the nation far more vulnerable to other countries and limiting the independence of the dollar.
While concerns about inflation and the lack of price stability are justified, treating the gold standard as a silver bullet that can solve our time's economic hardships is foolish and unlikely to be true.
Should the Gold Standard Restoration Act be made into law, the biggest losers are college students, many of whom do not have access to stable housing and lack food security. A smaller money supply due to an artificial government constraint would make it harder for those college kids to afford the goods and services they need.
But hey, whadda I know?
Kiran Subramanian is a junior in the School of Arts and Sciences majoring in economics and political science. His column, "Whadda I Know," runs on alternate Fridays.
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