Going Back To The Gold Standard 'Could Crush U.S. Economy' - Wells Fargo
(Kitco News) - Wells Fargo has issued a note directed at U.S. President Donald Trump, advising not to forget why America has dropped the gold standard.
What the U.S. bank is referring to is Trump’s pro-gold Federal Reserve nominees, one of them being Judy Shelton, who supports the return to a gold standard.
“We consider [Judy Shelton] to be a surprising choice for a pro-growth president. Ms. Shelton has the rare view that the U.S. should return to the gold standard—a restrictive monetary system, last seen during the Great Depression in the 1930s,” Wells Fargo head of real asset strategy John LaForge wrote on Monday.
In a commentary published in The Wall Street Journal in April, Shelton wrote: “It’s entirely reasonable to ask whether this might be better assured by linking the supply of money and credit to gold or some other reference point as opposed to relying on the judgment of a dozen or so monetary officials meeting eight times a year to set interest rates”
LaForge, however, argued that a return to the gold standard would put the U.S. economy in great danger.
“Using the gold standard today (as it was used back then) could crush the U.S. economy,” he stated. “History shows that the gold standard harmed U.S. growth and made the tough times tougher—a fact that we believe is important to remember.”
Despite containing inflation, the gold standard contributed to deflation during the times of economic downturn, according to Wells Fargo.
“The gold standard did help to contain inflation, but it had the unfortunate side-effect of making the tough times tougher, by fueling deflation,” LaForge said. “President Roosevelt nixed the gold standard in 1933 because it was making the Great Depression worse.”
The gold standard tied all of the U.S.’ credit creation potential to how much gold the country owned.
“No gold = no growth. In the U.S., by law, every $100 in Fed notes had to be backed by at least $40 in gold. The 40% level was used to contain inflation—keeping the government from printing too much currency,” LaForge described. “No gold = no currency creation = no economic growth.”
Wells Fargo’s chart below shows how “commodity price deflation went deeper, and lasted longer, while the U.S. was on the gold standard (prior to 1933).”
Federal Reserve Chair Jerome Powell also recently touched on the subject of a return to the gold standard, telling Congress last week that it’s not a good idea.
“We would then not be looking at maximum employment or stable prices. There have been plenty of times in the fairly recent history where the price of gold has sent signals that would be quite negative for these of those goals,” Powell said during his semi-annual testimony before the House Committee on Financial Services.
He added that the price of gold is not connected to the real economy like employment and inflation.
“If you assigned us to stabilize the dollar price of gold, monetary policy could do that, but other things would fluctuate,” he said. “This is why every country in the world abandoned the gold standard some decades ago.”