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IPFS News Link • Economic Theory

Adopting A Gold Standard Would Promote Fiscal Discipline

• by James Caton

Greenspan published an essay in support of a gold standard with unregulated banking titled "Gold and Economic Freedom" in July 1966. He remained an advocate of the gold standard at the time of his appointment as Chairman of the Federal Reserve in 1987. And he has continued to wax about the gold standard in the time since leaving the Fed. 

Among other things, Greenspan recognizes that the gold standard constrains government spending – and borrowing.

Much such infrastructure would have to be funded with government debt. We are already in danger of seeing the ratio of federal debt to GDP edging toward triple digits. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.

By now, the level of indebtedness has exceeded the value of U.S. GDP by an additional 35 percent. And the annual budget does not appear to be on course to reverse this trend any time soon. Under a commodity standard, like the gold standard, maintaining this risky position would be difficult, if not impossible, for the federal government.

Unlike Greenspan, most economists today see the gold standard as an arcane relic. But what if Greenspan is correct? Is it possible to regain the advantages of a gold standard today?