This article is in response to Trevor Whitney's article Is the Dollar Dying?

“In truth, the gold standard is already a barbarous relic.”

John Maynard Keynes

This year, the Republican Party polished off an idea formerly relegated to the dustbin of history. In its official party platform, the GOP calls for a commission to study the possibility of “a metallic base for U.S. currency” – in other words, a return to the gold standard.

The last time a major political party officially endorsed the idea of tying the nation’s currency to a limited, volatile commodity[1] was in 1984. That year, the economy was booming, the dollar was peaking and the dream of a return to the gold standard was in its death throes after President Reagan’s 1982 Gold Commission rejected the idea.

The world today looks wholly different, with a struggling economy and an embattled dollar. And the gold standard, once thought dead, has staged something of a comeback. In 2011, a whopping 44 percent of likely voters said they favored a gold standard. Representative Ron Paul has led the charge, (falsely) declaring any monetary system without a metallic base to be unconstitutional[2] and calling for an end to the Federal Reserve’s “debasement” of the dollar.

The argument goes something like this: without the gold standard, inflationary policies by unaccountable elites[3] at the Federal Reserve have steadily destroyed the dollar. Gold standard advocates point out that the U.S. dollar has lost around 95 percent of its purchasing power since Congress passed the Federal Reserve Act in 1913. This is true. It is also true that over the same period, average annual income per person increased 8,150 percent.

Gold standard advocates have also criticized the Fed’s use of unconventional monetary policies over the last few years, saying that they debase the dollar. Such policies have been aimed at keeping monetary conditions loose in order to prevent a repeat of the Great Depression and stimulate the economy in the absence of any Congressional action. Chief among these policies are asset purchases meant to pump dollars into the economy and nudge down long-term interest rates. This procedure is known as “quantitative easing,” or “QE.”

Normally, the Fed raises and lowers short-term interest rates to tighten or loosen the money supply as needed. However, during the Great Recession, interest rates hit rock bottom and could not drop any further. The Federal Reserve thus turned to more unconventional tactics, like QE, to keep monetary conditions loose.

And it had good reason to do so. In their 1963 magnum opus, “A Monetary History of the United States,” Milton Friedman and Anna Schwartz proved that the Fed’s inappropriately tight monetary policy caused the Great Depression. Later economists would show that the gold standard had been a key reason for this tight policy, and that the faster a country left the gold standard, the faster it recovered economically.[4]

One of those economists, a man named Ben Bernanke, apologized to Friedman and Schwartz on behalf of the Fed in 2002, saying: “You’re right, we did it. We’re very sorry, but thanks to you we won’t do it again.”

Six years later, as Fed Chairman, Bernanke got the chance to make good on that claim. As the American economy tanked in 2008, he slashed interest rates and began employing unconventional policies to loosen monetary conditions. The result was that this time around America avoided a Great Depression, even though the initial blow to the economy was similar to that of 1929.

Still, gold standard advocates are unconvinced. To them, the Fed’s actions only debase the dollar, destroy the middle class and set the stage for the coming hyperinflation. (Never mind the fact that the Fed knows exactly how to wring inflation out of the system, having done so under Paul Volker in the early 1980s.)

It is easy to understand why, when faced with a huge meltdown and slow recovery, some Americans might be pessimistic about U.S. economic power. But that does not mean predictions of a dying dollar are any more accurate than they have been in the past. The last four decades have seen a number of premature eulogies for both the dollar and American power. Each was made during difficult economic times and each has, to date, been proven wrong.

There are some important differences between today’s monetary and economic climate and the past. Whereas once a strong currency was seen as a boon, today many nations are enacting policies that will keep their currencies down.

Developed nations are employing policies like QE in order to keep monetary conditions loose, ward off deflation and help exporters. Switzerland, for instance, explicitly said it would cap the value of the franc by printing as much of the currency as necessary to stop its rise. Developing nations, no stranger to pegging their currencies, are also determined not to undermine their export-led growth strategies through appreciation.

Expansionary monetary policy at home has not destroyed the dollar’s dominance because other nations are also dealing with the problems of slow growth and deflationary pressures. Additionally, the dollar is still considered a safe haven for frightened investors. This is why the dollar surged in value in late 2008, even as Lehman Brothers collapsed and the financial system seized up. There is no currency presently fit to replace the dollar.

This is not to say that the dollar will always be the world’s single reserve currency. It most likely will not. But it will not simply die and be replaced, either. A more realistic forecast is that a multipolar international monetary system will replace today’s dollar-dominated one.

Nor is this to say that the government has reacted flawlessly to the challenges it faces. Congressional inaction, in particular, has shaken confidence in the American economy through the debt-ceiling debacle and lack of any movement on short-term stimulus and medium-term deficit reduction. But on the monetary end of things, the Fed has acted aggressively to support recovery. In supporting economic recovery, the Fed has paved the way for a stronger dollar in the future.


[1] Gold standard advocates often cite price stability as a key strength. Yet the evidence shows that prices on a gold standard can actually be quite volatile in the short term.

[2] The Constitution prohibits states from making “anything but gold and silver coin a tender” (Article I, Section 10), but grants the federal government the power “to coin money [and] regulate the value thereof” without any gold standard requirement (Article I, Section 8).

[3] Most of this denunciation of ‘unaccountable elites’ is aimed at Fed Chairman Ben Bernanke – an interesting criticism to lob at a man who is not only appointed by the President and approved by the Senate, but must also phrase every sentence carefully, lest it move markets.

[4] It should come as no surprise that a recent poll of economic experts revealed that none of them thought returning to the gold standard would be a good idea.