Cartwright—Great concept, but this is not going to happen. It would be nearly impossible to return to the gold standard at this point without severely disrupting financial markets. The dollar is strong right now against other currencies and inflation is relatively low. Go back to World War I. The US had double digit inflation for a couple years. Same thing during World War II. It’s nice to say that the gold standard would eliminate inflation but that’s not the case. Economic history over the last hundred years or so doesn’t bear that out here.
I like the idea of having gold in Fort Knox and knowing that the dollar is backed by something other than the full faith and credit of the federal government but it’s not practical and never has been practical. The gold standard didn’t stop us from getting in two world wars, a war in Korea, and a war in Vietnam. It didn’t stop the federal government spending more and more. It didn’t stop entitlement programs and the expanding welfare or entitlement state.
What we need to focus on is the full faith and credit of the federal government. We need to start balancing the federal budget, paying off the national debt, and reforming entitlement programmes so that the unfunded liabilities don’t bankrupt us in the next couple decades. Some of these reforms take massive political action, which isn’t going to be easy. We need to ensure we have a vibrant, competitive economy that’s producing jobs so that anyone who wants to work can work. Having people working solves a lot of problems in America.
When it comes to the Federal Reserve, we need to let the FOMC continue to do its job in seeking maximum sustainable employment and price stability. I think they’ve done a good job for the most part if you look at their history. It’s a tough balancing act that they have. Where I think they could make some changes is to increase the reserve requirements of banks. This requires banks to retain more of their deposits and reduces their lending capabilities which force them to make more judicious decisions in the lending process. The financial crisis of 2008 could have been avoided had the reserve requirements been higher. Higher reserves are not a bad thing financially for the banks but it is very unpopular as it limits their lending ability. The higher reserve requirements take money out of circulation and curbs inflation. On net, I think higher reserve requirements contribute to a more financially sound banking system which is crucial to having a sound economy.