Could Trump Bring
Back the Gold Standard? by Mark Nestmann
| March 15, 2017
Imagine the world in which
the president of the United States decides that the government
will set wages and prices. One evening, the president announces
to the nation:
“I am today ordering a freeze on all prices
and wages throughout the United States.”
After a short transition period, any increases
in wages or prices would need to be first approved by the
What would happen next? We don’t have to
look very far to see the consequences of such actions. That’s
because, on August 15, 1971, President Richard Nixon made
that exact announcement.
The results were disastrous. Farmers stopped
shipping out their crops for processing. Manufacturers laid
off workers and cut output. Food shortages quickly developed.
When Nixon stated this declaration, I was
a teenager. While my mother initially thought price controls
were a wonderful idea, she changed her mind only a few weeks
later. She found out that she could no longer buy her favorite
brands in stores. Manufacturers realized they could not
make a profit by delivering them at a government-controlled
Of course, there are many modern analogies.
For instance, Venezuela has had stringent price controls
in effect for over a decade. Not surprisingly, supermarket
shelves have been empty for years. There are pervasive shortages
of food, medicine, and other necessities.
Most of us almost instinctively recognize
the folly of wage and price controls. Yet, we’re perfectly
content to have the government control the nation’s monetary
system. This occurs through the Federal Reserve, which sets
short-term interest rates and periodically injects “liquidity”
into the marketplace to cope with financial crises and acts
as a lender of last resort.
The Fed’s policymaking decisions are made
in periodic meetings of its “Open Market Committee.” The
committee consists of 12 members – the seven members of
the Fed’s Board of Governors; the president of the Federal
Reserve Bank of New York; and four of the other 11 other
Reserve Bank presidents.
In other words, the monetary policy of the
US – the world’s largest economy – is effectively controlled
by 12 people.
According to the Federal Reserve Act, the
“monetary policy objective” mission of the Fed is to:
… promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest
So, how well has the Fed accomplished these
goals? Let’s focus on the issue of “stable prices.”
The graph you’re viewing is a historical
record of US price inflation from colonial times to the
present day. Note that price levels in the early 20th century,
before the Fed came into existence, were roughly the same
as they were in colonial times. What mechanism kept prices
stable, if not a central bank?
In the first 130-plus years of US history,
America operated on a “gold standard.” In other words, the
value of a dollar was defined in terms of gold, and anyone
who held dollars could exchange those dollars for gold.
At times the country used a bimetallic – gold and silver
– standard. At the same time, the US dollar wasn’t “legal
tender” – if you didn’t want to accept dollars as payment
for your goods or services, you didn’t have to. You could
demand payment in gold, silver, or even accept payment in
private currencies issued by many of the country’s banks.
In other words, there was competition for
money. Nor was there a mechanism in place for a lender of
last resort to “inject money” into the system, as the Fed’s
mandate permits it to do.
As the graph demonstrates, this system worked
superbly at controlling inflation. Once a committee of 12
started calling the shots, however, inflation began to rise
at almost an exponential rate.
For decades, discussion of a return to the
gold standard has been mostly restricted to earnest discussions
among libertarians. Occasionally, a professor publishes
an article on it in a seldom-read publication. But that’s
starting to change, thanks to a statement President Donald
Trump made during his campaign. In a March 2016 interview,
“We used to have a very, very solid
country because it was based on a gold standard… Bringing
back the gold standard would be very hard to do, but boy,
would it be wonderful. We’d have a standard on which to
base our money.”
I don’t know how much President Trump actually
knows about the gold standard, but his statement is factually
correct. Ending the Fed’s monopoly over money and interest
rates would be hard to do, but it could go a long way toward
fulfilling his promise to “make America great again.”
But what, exactly, would have to happen
for this to occur?
First, Congress would need to abolish the
Fed. There’s little political will to do that now, other
than a few Tea Party Republicans willing to at least entertain
That’s just for starters. Congress would
also need to redefine the dollar in terms of a unit of gold
– establish a price point for which the Treasury would be
obligated to exchange gold for dollars. And because a gold
standard works well only when all major countries adhere
to it, the US would need to persuade its major trading partners
– think China, Canada, the EU, and others – to go along
That might not be as hard to accomplish
as you think. The dollar is already effectively the world’s
reserve currency. Backing it with gold wouldn’t change that
status, other than making it more attractive. Many countries
also effectively link their own currencies to the dollar,
including China and much of Central and South America.
The biggest political obstacle to overcome,
though, will be the ingrained belief that in a financial
crisis, there must be a lender of last resort. To that,
I would simply say, “Why?”
In the financial crisis that began in 2007,
numerous banks, financial institutions, insurance companies,
and manufacturers were effectively bailed out by the Fed.
They carried out risky lending and underwriting practices,
knowing that if a crisis occurred, they could expect a handout.
Critics say that in a world with a gold
standard, insurance giant AIG would have collapsed. So would
nearly all of Wall Street’s mega-banks, most US auto manufacturers,
and many other companies. The recession would have quickly
turned into a depression, with cataclysmic results for the
But that’s missing the point. In a world
with a gold standard, the financial excesses that brought
about the events beginning in 2007 would never have occurred.
If your business isn’t expecting a handout if and when times
get rough, you tend to operate it more prudently.
Perhaps the best argument for a gold standard
came from former Fed Chairman Ben Bernanke, who, paradoxically,
opposes it. In testimony before Congress in 2011, he was
asked, “Why do people buy gold?”
Bernanke’s reply: “As protection against
of what we call tail risks: really, really bad outcomes.”