Friday, May 10, 2019

Interview: Kenneth Rogoff says going back to the gold standard "is a perfectly terrible idea", explains why

Editor's note: This interview was originally published in March 2017.

This is the second part of my discussion with Dr. Kenneth Rogoff. The first article is available here. 
Story by Joseph Ford Cotto
Tired of carrying cash around? Does one fellow have a plan for you.
"I am not advocating a cashless society, which will be neither feasible nor desirable anytime soon," Dr. Kenneth Rogoff wrote in a recent article for Project Syndicate. "But a less-cash society would be a fairer and safer place."
His main beef is with large-denomination notes; specifically the $100 bill. In the same piece, he said it "accounts for almost 80% of the US’s stunning $4,200 per capita cash supply" while, overall, physical currency "facilitates crime because it is anonymous, and big bills are especially problematic because they are so easy to carry and conceal." 
Rogoff, who holds the Thomas D. Cabot professorship of public policy -- in addition to an economic teaching post -- at Harvard University, has much more to say about the campaign for a cash-free country. Last year, his book, The Curse of Cash, was published by Princeton University Press and found no shortage of attention. One might say it became something of a lightning rod.

Clancy Yeates of The Sydney Morning Herald declared Rogoff's work "a fascinating contribution to the debate about what might be done to help get many wealthy countries out of an economic funk." Yeates noted that Rogoff's argument "says boring old paper (or plastic, in our case) bank notes are a major barrier to monetary policy--changing interest rates--fulfilling its potential."
On the other hand, The Wall Street Journal's James Grant unleashed the following: "If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice."
Aside from his currency activism, Rogoff is a chess grandmaster and the co-author of This Time is Different: Eight Centuries of Financial Folly, which soared to bestseller status in 2009. He recently spoke with me about many issues pertaining to the United States's economy. Some of our conversation is included below. 


Joseph Ford Cotto: Since it went into effect during late 1995, the North American Free Trade Agreement has formed a trilateral commerce bloc between Canada, the United States, and Mexico. From your research, has this proven to be of benefit to our country?

Dr. Kenneth Rogoff: The North American Free trade agreement is a much bigger deal for Canada and especially Mexico than it is for us.  Let’s start with the basic fact that already prior to the NAFTA, the US was already pretty open to Mexican imports, the big change was Mexico opening up to us. For Mexico, the lure of trade with the US has been a catalyst to making the nation more democratic and less anti-American.  It has led to the rise of a middle class that might otherwise have remained in poverty.  For us (the United States), it is really hard to sort out the effects of NAFTA from much larger global trends including the rise of China and advancing technology.  The best guess is that, despite Sanders’ and Trump‘s rhetoric on the topic, NAFTA slightly increased growth in the US and slightly affected the composition of jobs.  It is utterly na├»ve to think NAFTA simply cost US jobs, in fact, many goods are now produced jointly in the US, Canada and Mexico across complex supply chains that allow North America to be competitive in markets where it might otherwise be shut out.

Cotto: Some claim that the surest way for America to enjoy monetary stability is a return to the gold standard. Do you believe that, given current socioeconomic affairs, this is a viable option?

Rogoff: A return to the pre-war gold standard (fixing the value of the dollar in terms of gold) is a perfectly terrible idea, and about as sensible as having the United States adopt the euro. Yes, there is a small cadre of influential right-wingers who favor the idea, most famously representative Ron Paul in his populist manifesto “End the Fed.”

What would be wrong with a return to the gold standard? Gold advocates point to the halcyon days of the gold standard from 1870 until World War I.  But they seem to forget that although growth was fast in those still early days of the Industrial Revolution,  deep recessions and banking crises were frequent.  Under a gold standard, the Fed would be far more constrained in responding to a banking or fiscal crisis (since every dollar must be backed with gold).  Modern countercyclical monetary policy is by far the most potent tool for stabilizing the economy in recessions and that would be gone.  And most importantly, we now understand that gold pegs are ultimately vulnerable to runs and speculative attacks if the investors sense a lack of complete commitment to honor the guaranteed price of dollars for gold.  Indeed, once countries abandoned the gold standard so they could use inflation finance to help pay for World War I, it proved extremely difficult to reset system.  

The problems with the gold standard are very similar to those faced by Southern European countries that have surrendered their right to print their own currencies in order to join the euro.  Greece has an input into the policies of the European Central Bank, but the fact they cannot print their own currency has turned their debt problem into a disaster.  Italy, Spain, Portugal, Ireland, and Cyprus have all faced versions of the same problem.