Gold has had a remarkable ride — doubling in price over the last three years, as investors who lost faith in equities and bonds piled into the stuff. Conservative politicians are even more bullish, pushing gold to replace the dollar and get the government out of the business of managing the economy. “It has been money for 6,000 years,” Representative Ron Paul, a Republican presidential candidate, told the Federal Reserve chairman, Ben Bernanke, during Congressional hearings in July. It’s an “economic law.” Other Republicans, including Newt Gingrich and Herman Cain, have hinted that they might also like to peg the dollar to gold, which would limit the growth of money in the economy to the growth of gold in reserve, stopping the Fed from printing more dollars.
Glenn Beck, the former Fox News commentator, has spun his antigovernment jeremiads into a personal business plan to market gold. He forecast Zimbabwean rates of inflation just around the corner, advised his many viewers to put faith in God, gold and guns and pitched the business of Goldline, a company that sold overpriced gold coins and advertises on his show.
There was a time when the dollar was pegged to gold. Central banks around the world still hold gold in reserve as an investment. But shackling the dollar to the gold supply — or any commodity — is a terrible idea, for precisely the reason some conservatives love it: It would take away one of the government’s main tools of economic management.
In 1945, the British officer R.A. Radford published an essay about the economic organization of the German prisoner-of-war camps where he had been interned for four years. They worked like market economies, with one notable exception: prisoners used cigarettes rather than money as a means of exchange.
It was unstable, to say the least. Big deliveries of cigarettes by the Red Cross to the camp sparked immediate inflation, with the price for having a pair of trousers washed jumping from two cigarettes to four. As cigarettes were consumed, the price of everything else had to fall. And when the Red Cross’s supply of cigarettes was interrupted, the camp economy suffered intense deflation.
Gold can’t be smoked away. Yet, as money, it shares tobacco’s basic drawback: It would shackle the economy to how much gold we could get our hands on. Today the Fed can print dollars at will to meet the growing demand for money as the economy grows, or even to encourage growth. Under a gold standard, the economy couldn’t grow faster than the supply of gold.
To a large extent, the Great Depression happened because the Fed was required to keep enough gold to cover 60 percent of money in circulation, at a fixed price. This forced it to raise interest rates to attract gold reserves and forced the money supply to shrink when banks started hoarding gold. F.D.R.’s decision to jettison the gold peg in 1933 was essential to end the Depression, allowing a major devaluation of the dollar and boosting the amount of money in circulation. This lowered interest rates and primed a surge in investment.
It seems perplexing that Mr. Paul would want to try something that so clearly failed before. We wonder if the fact that much of his wealth is tied up in gold-mining stocks — and that he would certainly benefit if even more Americans caught the gold bug — might have influenced his judgment.
No matter what Mr. Beck may say about a hyperinflationary future, gold is risky. Core inflation is low and falling. Gold is down about 10 percent since August. When the gold bugs figure out that inflation isn’t coming back soon, gold may be in for a real fall.