The Republican Party is so concerned about inflation that it’s considering a return to the gold standard. While there’s little evidence those fears are justified, they could shape a Romney administration’s approach to the Federal Reserve.
The platform the party adopted yesterday at its national convention in Tampa, Florida, calls for a commission to investigate a possible “metallic basis for U.S. currency.”
The move is driven by supporters of Representative Ron Paul of Texas, the libertarian presidential candidate who has long criticized the Fed’s control of the money supply and wants to revive the gold-dollar link to preserve the currency’s value.
“We have a fiat currency that’s backed by nothing,” said Eric Brakey, 24, who ran Paul’s campaign in Maine’s Republican primary. “It’s really only backed by the say-so of our government, and I think the government is losing credibility more and more. Inflation is going higher and higher.”
Yet inflation has been tame, with the personal consumption expenditures index, the Fed’s preferred inflation gauge, declining in three of the past four months. Since the June 2009 end of the recession, the average increase in the index has been 1.8 percent, below the central bank’s 2 percent target. Over the last 20 years, the index has risen 2.1 percent, according to data compiled by Bloomberg.
“I’m not particularly worried,” said economist John Makin of the American Enterprise Institute in Washington. “It’s not as if we’re about to rocket higher.”
Most Americans aren’t worried either. The public expects inflation to remain subdued -- an annual average of 1.26 percent over the next decade, according to an estimate by the Federal Reserve Bank of Cleveland.
That hasn’t quelled concern among some Republican politicians that the dollar’s value is being eroded.
Mitt Romney, who will accept the party’s presidential nomination tomorrow at the convention, has criticized Fed Chairman Ben S. Bernanke for weakening the dollar through his bond-buying efforts known as quantitative easing. Romney said last week that additional Fed measures to stimulate the economy risked the potential for “inflation down the road.”
Such vigilance on inflation could affect the Fed if Romney wins in November. The former private equity executive has vowed to replace Bernanke, whose term expires in 2014. He’d likely fill any unexpected vacancies on the Fed board with inflation hardliners, who might favor raising interest rates before the end of 2014, as Fed policy makers currently plan, says Mark Thoma, an economics professor at the University of Oregon.
“If Romney is elected, he will put people on the board of governors who are very credibly hawkish,” Thoma said.
Romney’s running mate, Representative Paul Ryan, the House Budget Committee chairman, called in March 2009 for the Fed to base the dollar’s value on market measures “such as a basket of commodities.” Ryan also has assailed the Fed’s asset purchases.
“There is nothing more insidious that a government can do to its countrymen than to debase its currency,” he said in December 2010.
Since the September 2008 onset of the financial crisis, the dollar has lost 1.1 percent of its value on a trade-weighted basis.
The gold standard, which the U.S. dropped in 1933, isn’t coming back anytime soon. Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., calls gold talk “political noise.” Of the 37 economists who responded to a January University of Chicago survey asking whether restoring the dollar’s link to gold would benefit the average American, none said yes.
“A gold standard regime would be a disaster for any large advanced economy,” wrote Anil Kashyap, a former Fed economist and now a University of Chicago economics professor.
President Franklin D. Roosevelt took the dollar off the gold standard shortly after he took office in 1933, a move that economists say helped lift the economy from the depths of the Great Depression. In August 1971, President Richard Nixon broke the last link to gold, ending the ability of foreign central banks to convert their dollars into the metal.
Now, Republicans are eyeing a study of “possible ways to set a fixed value for the dollar.” No specific gold proposal is under consideration. Restoring a dollar-gold link would remove from policy makers the ability to respond to a financial crisis such as the 2008 credit crunch and would be enormously complicated, economists say.
If the U.S. pegged the price of gold too high, the result would be inflation as investors rushed to sell their gold to the Fed, thus boosting the domestic money supply. If the price were set too low, gold would flow out of the U.S., shrinking the money supply and igniting a job-killing spiral of deflation or falling prices, says AEI’s Makin, a former consultant to the Treasury Department and International Monetary Fund.
The Republican platform last included a gold plank in 1980. Once elected, President Ronald Reagan appointed a 17-member commission, which included Paul, to study the matter. It determined in March 1982 that a return to the gold standard “does not appear to be a fruitful method for dealing with the continuing problem of inflation.” Paul dissented from that conclusion.
Since September 2008, the price of gold has almost doubled to about $1,665 an ounce, even as some on Wall Street question the rationale of buyers.
“Ultimately, you are going to buy gold if you think there is going to be some kind of persistent, severe inflation problem, and that just doesn’t seem to be very realistic,” Michael Hood, a market strategist for JP Morgan Asset Management, said in an Aug. 24 interview.
For many, their inflation fears stem from a belief that Fed failures helped cause the financial crisis and that its policies since then have risked greater economic distress. The Fed began cutting its benchmark Federal Funds rate in 2001 and kept it below 2 percent until late 2004, a stance that helped inflate the housing bubble.
The Fed’s unprecedented efforts to fight the financial crisis, including more than tripling its balance sheet to $2.83 trillion, have stirred outsize opposition.
Bernanke “is a traitor and a dictator,” South Carolina State Senator Tom Davis told Paul supporters crowded into Tampa’s Sun Dome Arena on Aug. 26.
Gold bugs and Fed critics fear a return to the price spirals of the administration of President Jimmy Carter when annual consumer price increases hit 14.8 percent in March 1980. James Grant, editor of Grant’s Interest Rate Observer, says a new gold standard would be better than leaving monetary policy in the hands of “a group of mandarins at the FOMC.”
Some Fed governors share the inflation worries. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, has suggested that interest rates need to rise before inflation ticks up. Additional Fed easing designed to spur growth likely “would increase inflation as well,” he told Charlie Rose on Aug. 26.
Now, some analysts worry that Bernanke’s Fed is making another mistake, using bond purchases to reduce interest rates that are already at historic lows.
“We do not have a monetary problem. There’s no shortage of liquidity. So what’s the point of adding reserves?” said Allan Meltzer, a professor of political economy at Carnegie Mellon University and the author of a two-volume history of the Fed.
Critics such as Meltzer worry that the Fed will wait too long to begin withdrawing its extraordinary financial support. “We have a long history of producing money too fast, faster than the growth of the economy, and it always ends up in inflation.”
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