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Should we return to a gold standard?

Ralph Benko and Charles Kadlec, both long-time supply-siders (even longer than me), recently published a nice booklet, The 21st Century Gold Standard," that can be downloaded for free at the link. It covers gold standards throughout history and how and why they have been successful in maintaining a constant purchasing power for currencies, and it makes a strong case for returning to a gold standard today. The authors back up their arguments with solid reasoning and plenty of facts, and they convincingly counter all the standard arguments against a gold standard. The booklet is short, well-written, eminently sensible, and accessible to everyone. If you've ever wanted to know more about how and why a gold standard is the best hope for a stable currency and a strong and prosperous economy, this booklet is for you.

One important detail about returning to a gold standard gets only a brief mention in the book: at what gold price should the dollar once again be tied to gold? The authors say only that "one of the key principles for the transition to a gold standard is to allow a market price discovery period to ensure, with complete confidence, that the current price level is maintained and there is no downward pressure on wages." That's important, because if the dollar is pegged to a gold price that is too high, then it will lead to inflation, while pegging to a gold price that is too low would lead to deflation. How to find the right gold price might well be the most difficult and critical part of transitioning to a new gold standard. By announcing the advent of a new gold standard well in advance, markets would have a chance to get used to the idea and its implications. Right now the price of gold reflects a significant amount of uncertainty and fear of higher inflation. If a new gold standard were done right, the gold price would likely decline significantly before being pegged, because these uncertainties would be eliminated. My guess is that the price would be closer to $500/oz., the average real price of gold over the last century, than to its current price.

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