A loyal MR reader requests:
…your thoughts on fiat currency vs currencies backed by precious metals.
could a return to the gold standard for the US dollar, as advocated by
US congressman Ron Paul, bring about a superior economic system?
A gold standard has few advantages over a responsibly run fiat currency, as we have had since about 1980. A real, laissez-faire gold standard involves a pro-cyclical money supply, and who wants that? Why let the money supply shrink during bad times? Some prices and wages are sticky in nominal terms, if only because people feel they are being taken advantage of, not "holding their ground," or losing relative status. Just read Truman Bewley’s book. Nominal stickiness is rooted in human nature.
Maybe we could get used to periodic or ongoing deflation, but it would take some doing. In the meantime two percent inflation is not so bad. On the other side of the debate, the resource costs of the gold standard have been overplayed.
The best and indeed only argument for gold is the view that we must, sooner or later, return to rampant inflation. That has been the rule for fiat money throughout most of human history. I think today seigniorage is not an important source of government revenue and financial markets punish politicians for inflation pretty quickly. So I am willing to wait for the "later" to come before making any switches away from fiat money. Keep in mind, people can already denominate their contracts in terms of gold, and hardly anyone wishes to do so.
#22 in a series of 50.