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Moore on Gold and Commodities

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TweetApril 30, 2019 —   A century ago, the gold standard was considered a guarantor of monetary stability.  That golden era is long-gone.  (If it ever really existed at all.  The general price level fell 53% in US and 45% in the UK during 1873-1896 due to a dearth of gold deposit discoveries.) Continuing my thoughts on the Fed candidacy of Stephen Moore: he has said several times that he favors a return to gold.  In true Trumpian fashion, he recently denied having said it despite the clear video evidence. Commodity-basket proposals In any case, he now says he favors having monetary policy focus on a basket of commodities, not just gold alone.  This has brought him some ridicule.  It is true, however, that a price index based on a variety of commodities would attenuate the volatility of

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April 30, 2019 —   A century ago, the gold standard was considered a guarantor of monetary stability.  That golden era is long-gone.  (If it ever really existed at all.  The general price level fell 53% in US and 45% in the UK during 1873-1896 due to a dearth of gold deposit discoveries.)

Continuing my thoughts on the Fed candidacy of Stephen Moore: he has said several times that he favors a return to gold.  In true Trumpian fashion, he recently denied having said it despite the clear video evidence.

Commodity-basket proposals

In any case, he now says he favors having monetary policy focus on a basket of commodities, not just gold alone.  This has brought him some ridicule.  It is true, however, that a price index based on a variety of commodities would attenuate the volatility of the gold market.  There was a time, in the 1930s after FDR took the US off of gold, when leading experts Benjamin Graham and John Maynard Keynes weighed the advantages of a hypothetical commodity basket standard.

In the case of a country that specializes in exports of mineral or other commodities, one can make an argument for targeting an index of those export commodity prices, as an alternative to the option of targeting the CPI.   In the case of a country like the United States, proposing a commodity price target would be foolish.  But it is true that commodity prices  are sensitive to real interest rates.  One could make a case for including them alongside stock prices and the exchange rate in a financial conditions index. Real commodity price indices correctly reflect that US monetary policy began tightening in 2013-14, while today still remaining loose by historical standards.

Does populism mean going on gold, or off it?

In the late 1970s, the supply siders who hitched themselves to Ronald Reagan’s 1980 candidacy famously campaigned for large tax cuts (which, they said, would pay for themselves).  But they also tended to have a particular view on monetary policy: that the US should consider returning to the gold standard. The movement achieved the creation of a high-level official Gold Commission, but lost some momentum after it submitted its report in 1982.

In the 1980s, supply siders like Congressman Jack Kemp continued to campaign for a return to the gold standard, arguing that this would allow an easier monetary policy, which they thought was the only thing holding back the success of the supply-side strategy. (The price of gold was declining in 1981-1984, having come off a record high in 1980.  Thus, it was a time when stabilizing the price of gold might indeed have implied an easier monetary policy.)

It was noted then, as now, that to have a small-government populist arguing in favor of the gold standard stood on its head the history of American populism.  That history was memorably represented by William Jennings Bryan’s campaign for the presidency during the deflationary 1890s, on a platform declaring that farmers and workers would refuse to be “crucified on a cross of gold.”

On this, Bryan was ahead of his time.   The crude handcuffs of a standard based on gold or other mineral commodities may have played a useful role in preventing chronic inflation in the 19th century.  But that era is no more.  The Fed in recent years has shown that it can do better on its own, with competent appointees working under the protection of institutional independence.  Senators should think about that, if they are called upon to vote on Stephen Moore’s confirmation.

[This is Part II of an extended version of a column that appeared in Project Syndicate, April 28, 2019.  the version

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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