Unsound Populism

Dissatisfied with the Federal Reserve’s lax monetary policy, the American Republican party has discussed creating a “gold” commission that would analyze the option of pegging the dollar to gold. However, experts believe that doing this today would be nothing short of impossible, as American gold reserves are currently far smaller than paper money holdings and debts.

Republicans have decided on a new direction for economic policy and now advocate returning to the gold standard for the first time after a 30-year hiatus.

According to the Financial Times, if Republicans emerge from the November elections victorious, they will create the special “gold” commission that would audit the Fed’s monetary policies and analyze the possibility of pegging the dollar to gold. However, Republicans still have not made this issue a matter of public debate; their definitive decision about creating the task force will be made next week at the Republican National Convention in Tampa, Florida.

Republican presidential nominee Mitt Romney includes returning to the gold standard in his official platform, indicating that Republicans are moving toward a platform rich with radical and unorthodox plans and ideas.

Earlier this week, Romney announced that, if elected, he would conduct a large-scale audit of the Fed’s balance. The candidate also announced his plans to replace Federal Reserve chairman Ben Bernanke by refusing to nominate him to a third term.

The gold standard has not entered the Republican vocabulary by accident, as the party has been dissatisfied for some five years with the Federal Reserve’s lax monetary policy. “There is a growing recognition within the Republican Party and in America more generally that we’re not going to be able to print our way to prosperity,” Sean Fieler, chairman of the American Principles Project, a conservative non-profit organization, said about the Fed’s potential new round of quantitative easing.

It must be noted that the gold standard is no longer just the pet cause of a handful of zealots. Recall former World Bank president Robert Zoellick’s sensational 2010 Financial Times article in which he proposed a multipolar financial system that would use five anchor currencies (the dollar, the euro, the pound, the yen and an unfixed yuan) and would use the gold standard as a guide for central banks and market players.

Gold, Zoellick reminded readers, remains the “alternative currency” that still goes up in price during crises. His article came out on the eve of the annual G20 summit, but his recommendations were never translated into global action. Meanwhile, gold continued to rise in price.

President Ronald Reagan launched the first Republican gold commission in 1981, 10 years after Richard Nixon, perhaps the most odious president in the history of the United States, abolished the gold standard during the height of the oil crisis.

In 1980 and 1984, Republicans advocated a return to the gold standard, but in the years since the party has not included the issue in its electoral platform. In spite of its lax monetary policy, the Federal Reserve has kept inflation under control and has worked to protect the American economy from external shocks by managing interest rates.

Time and again experts have refuted the possibility of returning to the classic “gold standard.” The practice existed in developing countries until 1914, when issuing currency was strictly correlated to the number of gold bars in the vaults of the country’s central bank. According to analysts, the gold standard would just stifle the modern economy as governments would have to enforce a strict monetary policy that could inhibit economic growth.

FxPro financial analyst Alexander Kuptsikevich finds the Republicans’ proposal to be unsound. “If you give power to politicians, they will promise the impossible. They’ll surely make promises about the economy, but it is obvious that the world economy has outgrown the gold standard,” he explained.

According to Kuptsikevich, implementing gold-pegging would only be possible in the event of an extraordinarily catastrophic collapse that would somehow return the world economic and financial system to its state a century ago.

“Looking at the facts, it’s apparent that America’s abandonment of the gold standard occurred because the government could not ensure the sale of gold at the price at which it was committed to sell. Today, paper money and liabilities have grown in worth many times over,” Kuptsikevich continued.

In other words, the United States will not be able to match their economy to their gold reserves in Fort Knox, the Kentucky military base that has housed the country’s gold reserves since 1936.

Officially, the United States holds just more than 8,000 tons of gold. At present prices, their gold holdings are equivalent to $436 billion. This amount represents 3 percent of America’s GDP and is just about half the sum of the stimulus package given to the financial system in 2008, Kuptsikevich noted.

Zerich Capital Management senior analyst Oleg Dushin agrees that the returning gold standard is in many ways a utopian ideal. According to him, the modern economy has become too complex and virtual to return to the gold standard. “Money has become electronic, so what’s the use if it’s tied to gold?” he proposed. “If there is a need for additional financing, what will the United States Treasury do? Look for the philosopher’s stone to create an infinite supply of gold?”

The United States is burdened with great debts that threaten the dollar as the world’s leading currency. However, attempting to prop up the dollar with the gold standard is doomed to fail since no other countries would follow America’s lead, Dushin explained. “If they peg the dollar to gold, they will have to reduce the quantity of gold in dollars, just as monarchs in Europe during the Middle Ages did. Central banks certainly have reasons to cultivate gold reserves, but this is not a miracle cure,” the analyst concluded.