The financial press is giving a fair amount of attention to the fact that the Republican platform is calling for a commission to study the idea of a gold standard. As far as bad monetary policy ideas go, I find this one pretty inoccuous. Ronald Reagan appointed a commission like that early in his term as a sop to the monetary nutters in his coalition and it sensibly recommended that we not do it. Commissions are a great way to kill bad ideas.
The striking thing to me is that the GOP’s vice presidential nominee and acknowledged thought-leader Paul Ryan has been stumping for some time on behalf of a worse idea.
The notion of tying the value of the dollar to a basket of commodities sounds at first glance like a sophisticated alternative to the crudeness of a gold standard. But the problem and the merits of the gold standard are one and the same—it’s basically arbitrary. You’re letting the supply of money be determined by fluctuations in the gold mining industry that have nothing to do with anything. That’s annoying, but it’s not catastrophic. Money based on a broader set of actually useful commodities is much more problematic. It means that if a drought devastates the corn crop or a war disrupts Persian Gulf oil supplies, we automatically respond with tight money and a demand-induced recession. Alternatively, if someone discovers a cheap pollution free method of generating unlimited electricity we’d end up with a ton of inflation. And unlike gold, proponents of this approach can’t even appeal to history and tradition as an excuse.
Commodity-backed money is basically a solution to a non-problem. Or at least it’s not a problem you have if you don’t accept a Randian deeply moralized view of market outcomes. The existince of fiat money is embarassing to that kind of ideology, so it inspires quests for alternatives to modern central banking even when the alternatives don’t make sense.