This post was written in 2012–2013 and reflects thinking at the time. For current views and topical discussions, please see recent articles.
It's a truth universally acknowledged that the international financial system is broken is some fundamental ways. Many blame the huge increase in money supply (and, linked to that, of cheap credit) since the early 1990s for the over-heating of the global economy that culminated in the 2008 crisis. Since then, while the full economic collapse feared at the time has been averted (at least for now), many of the leading economies are suffocating under the weight of debt, accumulated both in the run-up to 2008 and in the "quantitative easing" afterwards. In many senses, the cure has been worse than the disease.
Against this background, the Republican Party is considering returning to some kind of a gold standard system for the greenback. While the stated commitment to a saner monetary policy is laudable, is the suggestion itself a credible one?
Let us remind ourselves what happened in the 41 years since the US abandoned the gold link and introduced a fiat currency. In 1970, the last year under the gold standard, US federal debt was 28% of GDP, whereas for 2012 it is estimated at 74%. With the individual states included, the public debt was 102% of GDP in 2011. Of the industrialised countries, only Japan and PIIGs had more. Also, given the size of the US economy, we are talking some truly astronomical numbers. In a normal economy, this mountain of debt would result in pretty high interest rates, leading to a full-blown depression (as it has done e.g. in Greece and Ireland), and possibly riots in the streets. In reality, though, 3-month Treasury Bill yields have been hovering just above zero since 2008, and are projected to remain there for the next couple of years.
The reason for this is the liberal printing of fiat money by the Federal Reserve System. Unlike Germany in the early 1920s, hyperinflation has not been the result because the US dollar is the world's main reserve currency, so foreign investors have been happy to soak up trillions of freshly printed dollars to buy Treasury Bills, still considered to be a "safe heaven". Of course, this leads to escalating debt, which needs to be serviced, etc. Eventually the bubble will burst - but not quite yet. Returning to the gold standard would prick the bubble immediately and bring the whole sorry edifice crumbling down. Even the most ideologically-driven Republicans are not "brave" enough for that.
