My last column, “Numbers can Lie”, recommended listening to experts whenever one is confused by economic data. But, this isn’t restricted to economic data. It’s common sense to observe experts’ opinions and defer to experts whenever they express unanimous consent on an issue.
People heed this common sense in most subjects. For example, physicists have unanimously discredited truthers’ claims that something other than airplanes brought down the Twin Towers. Document experts, even conservative Fox News document experts, have debunked birthers’ claims that President Barack Obama’s birth certificate had been forged. Even though most people don’t understand the exact physics behind the Towers’ collapse or the intricacies of legal documents, rational people trust experts, and truthers and birthers are thus regarded as more interested in personal vendettas than facts.
While discussions that challenge physicists and document experts are mostly confined to conspiracy theorists’ chat rooms, discussions that challenge economists are gaining a greater say in policy discussions. An example of this is the discussions about reintroducing the gold standard.
A bit of background: The gold standard is a monetary system in which a country either uses gold as currency or agrees to sell gold for a fixed amount of a circulating currency, which effectively pegs a currency to the price of gold. If markets, instead of gold, determine a currency’s value, the currency is said to be a fiat currency.
For most of history, nations have either used a gold or silver standard. After the Second World War, Western nations decided to peg their exchange rates to the U.S. dollar, which was pegged to gold. This created a gold standard for most of the Western world. In 1971, the United States ended the dollar’s peg to gold and instead floated its currency on the market. As a result, the Western world’s gold standard ended, and most Western nations adopted fiat currencies. Since 1971, the dollar’s value has been determined the same way a bicycle’s value is determined: by the free market.
Now some politicians, presidential candidate Ron Paul in particular, want to reintroduce the gold standard. These gold standard proponents present several arguments in favor of the gold standard.
For example, if a government prints too much money it leads to inflation. Since a currency pegged to gold must maintain a certain value, a gold standard limits the amount of currency that may be printed. Thus proponents see the gold standard as an effective way to limit inflation. Some also note that a gold standard leads to stability in exchange rates between nations using a gold standard and claim this stability is good for the economy. They further claim a gold standard can limit the amount of debt a country may issue, which would act as a barrier to deficit spending.
Opponents of a gold standard, on the other hand, note that pegging a currency to gold or anything else limits the monetary policies a nation’s central bank can take. They point to Greece as a good example of currency pegging gone wrong.
Greece is entering its fifth year of recession. Were Greece still using the drachma, its central bank could take measures to devalue the currency. A cheaper currency would lead to increased Greek exports, which would help bring Greece out of recession.
But Greece adopted the Euro in 2001, which effectively pegged its currency to that of other euro zone nations. By doing so, Greece surrendered its ability to control monetary policies to the European Central Bank. This currency peg is part of the reason why Greece’s recession has continued, with an unemployment rate of nearly 20 percent and massive cuts to public services that are hurting the average Greek.
With both sides of the gold standard discussion presenting interesting, albeit complicated, arguments, it’s important to consider experts’ opinions regarding the gold standard. The University of Chicago Booth School of Business regularly polls 40 economists from top universities on economic questions. The poll’s creators have chosen economists from across the political spectrum to include a wide range of political theories.
One recent poll asked the economists to evaluate the following statement: “If the U.S. replaced its discretionary monetary policy regime with a gold standard, defining a ‘dollar’ as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American.”
Every single economist polled either disagreed with the statement or strongly disagreed. That is, experts agree that reinstating the gold standard is a horrible idea. But despite economists’ uniform opposition, a reintroduction of the gold standard is still being discussed.
Today, any attempt to turn coal into gold would be seen as a little silly, because society respects chemists’ opinions that such an attempt won’t work. Perhaps in time economists’ opinions will receive equal recognition.