In Tuesday’s Republican presidential debate, Senator Ted Cruz reintroduced an idea that had many viewers scratching their heads and nearly all economists pulling out their hair. Mr. Cruz advocated a return to the gold standard — that is, tying the value of a dollar to a set amount of gold — because, he said, it produced prosperity under the Bretton Woods system and it helped “workingmen and -women.”  Mr. Cruz is confused about history and economics. The framers of Bretton Woods specifically designed their new international monetary system not to be a gold standard because they believed gold-based currency was largely responsible for the Great Depression. Their system, named for the New Hampshire town hosting the 1944 international conference that created it, was not a gold standard but “the exact opposite,” according to John Maynard Keynes, one of the system’s principal designers. Under Bretton Woods, nations were not obliged to set monetary policy according to how much gold they had, but rather according to their economic needs.  Leaving his historical errors aside, Mr. Cruz is not the only Republican presidential candidate to express admiration for the gold standard: Senator Rand Paul and Ben Carson have, too. The gold standard has long been a pet cause among some conservatives (it was hinted at in the 2012 Republican platform) and has gained credence among mainstream Republicans as a tool to limit government influence over the economy.  But a return to the gold standard would be catastrophic, especially as we continue the climb out of our Great Recession. That is because, as the framers of Bretton Woods knew, the course of an economy depends not only on what happens, but on what people expect will happen.  Under a gold standard, the amount of gold a nation holds in bank vaults determines how much of its money circulates. If a nation’s gold stock increases through trade, for example, the country issues more currency. Likewise, if its gold stock decreases, it issues less.  Gold as currency has obvious problems. First, there is relatively little of it while there are more people and goods all the time. So in the long term, the gold standard exerts a downward pressure on prices as money becomes relatively tighter and its value increases. If prices continue to decline, people are less likely to spend their money. After all, if you believe that the price of, say, shirts will continue to drop, you’ll delay splurging on haberdashery.  With enough time, the gold standard can create a deflationary spiral that brings an economy completely to a halt — which is what happened in the Great Depression. It was for this reason that Franklin D. Roosevelt abandoned the gold standard in the first days of his presidency, declaring that he would make the dollar into a “managed currency” the value of which policy makers might increase or decrease in response to economic need. In giving policy makers the power to regulate the money supply as they saw fit, Roosevelt created the expectation of a turn toward inflation, giving people reason to spend more money in the short term. (As Keynes observed, inflation causes problems, too, but at least it encourages spending, while the expectation of deflation can “inhibit the productive process altogether.”)  Recovery began as soon as Roosevelt took office in March 1933, and his use of the dollar to spark recovery created the basis for the adoption of managed currencies around the world. Eleven years later, Bretton Woods gave multiple currencies fixed but adjustable rates. Nations now had precisely the freedom the gold standard denied them, to use monetary policy to regulate their economies. (The United States dollar had a nominal value in gold of $35 an ounce but the country was not obliged to set monetary policy according to how much gold it had.)  Mr. Cruz correctly notes that the world economy enjoyed decades of prosperity under Bretton Woods, but that happened without a gold standard, not because of one. Why is a discredited policy now attractive to Republicans? The gold standard suits a political moment. Tying the dollar to an arbitrary quantity of shiny metal binds policy makers’ hands, robbing them of their discretion to act: The central bank can’t adjust the money supply to counteract crises or prevent them. These limits, for many Republicans, are good things. The gold standard is essentially the monetary equivalent of a government shutdown.  A new Bretton Woods might be a good idea, to encourage greater international cooperation on monetary issues, but a gold standard is not, as nearly all economists agree. Even the mainstreaming of gold-standard talk can have bad consequences, should its proponents gain the ability to pressure central bankers to tighten the money supply, as a gold standard would oblige them to do. A return to the good old days of gold could leave us vulnerable to precisely the outcome Bretton Woods was intended to prevent: another Great Depression.  Eric Rauchway is a professor of history at University of California, Davis, and the author of “The Money Makers.”
Presidential hopefuls like Ted Cruz see the gold standard, which economists argue led to the Great Depression, as a control on big government.