The Problem with a Gold Standard, and an Alternative

I was just cruising through the blogosphere, and found this little piece by Scott Sumner, who is a brilliant and innovative monetary theorist. He's discussing the policy idea in which "the Fed buys and sells unlimited CPI or nominal GDP futures contracts at a price equal to the policy goal" and goes on to say:

Because it’s such an unusual way of thinking about monetary policy, it might help to compare it to the gold standard. The U.S. successfully pegged the price of gold at $20.67/oz. from 1879-1933, and at $35/oz, from 1934 to 1968. So in a technical sense a gold standard is very doable, even the devaluation of 1933-34 was not done because we ran out of gold, but rather to further FDR’s macro objectives. But that is also exactly what is wrong with a gold standard, pegging the nominal price of gold does not stabilize the relative price of gold (in terms of other goods.)

After establishing this, he goes on to offer an alternative to the gold standard, pegging the price of a CPI futures contract:

So why doesn’t the Fed peg the price of a composite good, where the weights are the same as in the CPI? Because there are no highly liquid commodity markets for most components of the CPI. This problem, however, suggests an obvious answer–peg the price of a CPI futures contract. Of course Barney Frank might complain to Bernanke that inflation targeting doesn’t meet the Fed’s legal obligation to worry about both inflation and employment, the so-called “dual mandate.” If so, then switch to a 4% or 5% nominal GDP target, which is a hybrid inflation/real growth target (and in my view is a better target anyway.)

Under that sort of regime we never would have experienced the dramatic economic crash that occurred last fall...

blogsandwikis.bentley.edu...-120

I'm not an expert in monetary theory, but this seems to make a lot of sense. Any thoughts?



[edit on 25-2-2009 by theWCH]

Pegging our currency to CPI is not as good of an idea as he thinks. The CPI is heavily manipulated and not a reliable standard of price tracking. Because of this you will wind up with inconsistent and uncontrollable over-valuation, and devaluation of the dollar almost every quarter.

It's just another false monetary standard. And it still doesn't talk about fractional reserve banking which is the cause of, in many cases, the inflationary numbers we see in M2. We can't look at M3 anymore because the Fed doesn't want us to see the manipulation, but M2 is a good clue. So is M1 when you see that hockey stick effect. Tying the monetary system to CPI and not addressing it's manipulated data while allowing fractional reserve to inflate the money supply on their own would likely crash the dollar within weeks of implementation.

Scott is kind of clueless here.

[edit on 25-2-2009 by projectvxn]

[edit on 25-2-2009 by projectvxn]

well i am not the most fluently when speaking of the gold standard but i never thought there was a huge problem with it before its depart in the mid/late 1900s.

speaking of the gold standard i had an idea watching television the other day..
each channel you watch you see these people telling you that they will offer a handful of money for unused gold and such. Now is there any possible way that this is some way to acquire the gold standard back in the US. either its a gov't thing hinted under names such as cash4gold or goldkit or are these companies trying to buy off gold only to re sale to the gov't for a higher profit??

In the 1700s, an ounce of gold would buy you a medium quality men's suit.

In the 1800s, an ounce of gold would buy you a medium quality men's suit.

In the 1900s, an ounce of gold would buy you a medium quality men's suit.

Today, an ounce of gold would buy you a medium quality men's suit.

Seems to me that pegging the dollar to gold would work just fine, as long as the price of gold isn't artificially inflated/deflated.

Prices for futures contracts are easily manipulated.

reply to post by theWCH


The best possible solution would be (as Ron Paul has been saying) to peg each dollar to a fixed amount of gold, silver, platinum, oil, wheat, etc. as a commodity basket. There is no reason why gold should be more than 5% of a coins value. Using the principle of diversification it should be no more than 1/20 of the value of the dollar.

The dollar should simply start all over again because it has already gone down in value by over 95%! Each new penny should be worth about 10 cents in today's money. One new penny should be enough to buy a candy bar at the store. Therefore, we should be able to trade 10 old dollars in for 1 new dollar but each new dollar should be worth 10 times as much. But then we would have taxpayers footing the bill to make other people's worthless money actually be worth something. So we should not do that. So basically money needs to be simply declared worthless and whoever is screwed the most we just have to put together a voluntary system of providing their basic needs while they replenish their bank with actual value.

You cannot diversify th value of a dollar in the broad commodities market. Because you have to deal with futures. You can bet inflation would come with that quickly, especially in high demand times. Your currency would inflate out of control in a few years. There are two successful pegs and that is gold and silver. If you're going to diversify in commodities you should use metals like gold and silver and maybe even palladium as it holds value as consistently as gold.

As I explained in my last post, it would be like tying it to CPI. Where the futures market in commodities is concerned, a speculative bubble or data manipulation could potentially destroy your currency in a relatively short while. You want to peg currencies to commodities that HOLD their value, not ones that shift.

Originally posted by projectvxn
You cannot diversify th value of a dollar in the broad commodities market. Because you have to deal with futures. You can bet inflation would come with that quickly, especially in high demand times. Your currency would inflate out of control in a few years. There are two successful pegs and that is gold and silver. If you're going to diversify in commodities you should use metals like gold and silver and maybe even palladium as it holds value as consistently as gold.

As I explained in my last post, it would be like tying it to CPI. Where the futures market in commodities is concerned, a speculative bubble or data manipulation could potentially destroy your currency in a relatively short while. You want to peg currencies to commodities that HOLD their value, not ones that shift.

Show me the historic price quotes to show you are right and I'll believe you. Eventually I'll do that research myself regardless. I believe that by having what you say are wild swings in prices will actually keep the value steady. I think silver and gold swing just as much as wheat and oil.

Rising commodities prices are a deflationary pressure on a commodities-based currency. Only plummeting commodity prices would be an inflation factor. But regardless, the more diversity you have, the less inflation or deflation you have, which is the whole point. So I very strongly disagree with you.

futures.tradingcharts.com...

In this website you can analyze historical data of Futures commodities. Most have had a history of inconsistency in the market. Especially foodstuffs, oil, and NatGas. In the Metals market the most inconsistent are copper, platinum, and aluminum.

The most stable in prices when you deal with futures are Uranium, Palladium, Gold, and Silver.

Enjoy the research.

reply to post by sir_chancealot


So would an average weeks pay during those periods(or less as time went on). It just so happens that Men's suits have risen in price much less than the economy as a whole. Show me a period of time over 27 years where stocks were flat like gold has been ove rthe last 27 years. How did your gold keep up with infaltion during that time? Golds link to inflation is a fallacy.

As far as a currency we shouyld stick to the dollar. Institute a flat fed funds rate and adjust the velocity of the economy by adjusting bank reserve requirements. The changing of inteerst rates is death to the economy over time.