Does Donald Trump want to get rid of the central banking system that keeps big banks honest and potentially replace it with an impossible system called the “gold standard”?
Right now, according to a December 2 report from IB Times, there are hopes that the Federal Reserve will adjust the dollar because Donald Trump getting elected and other events have had a negative effect on gold prices in November.
Although it is still over a week away from the Federal Reserve making a decision about adjusting the dollar at their meetings from December 13 to 14, there is also a lot of fear brewing at and around the Federal Reserve because of Donald Trump. Worries about what Trump might change are valid concerns because the Federal Reserve is the checks-and-balances, regulation, policy-making, and supervision part of the banking world.
As the news was officially announced that gold prices fell by eight percent in a single month in November, Trump was talking to one of his potential picks for the Treasury Department Secretary, and that pick is known to toy with the idea of reintroducing the “gold standard.”
It is well known that the current Federal Reserve Chief, Janet Yellen, will be retiring in 2018, and Trump, as potential president-elect, will be in charge of replacing her. Sadly, when it comes to government-related economy positions, Trump considers candidates like John Allison, and Allison has ideas about the gold standard that many find troubling.
On December 1, Reuters reported that Trump making changes at the Federal Reserve with some of the ideas he has touted in the past could “rewrite policymakers’ core economic assumptions.”
Worse, in the next years, the Federal Reserve could include appointing four or more Trump supporters to the seven-member Board of Governors, and their appointment terms often last a considerable amount of time.
Janet Yellen says the Federal Reserve must strive to be independent as a central bank (from the commercial banks and also the government), and sometimes a country’s central bank must take the long-view to make “decisions that are not immediately popular” in the short-term within political realms.
When Janet Yellen’s term expires in February 2018, Reuters stated that there was worry that Trump would “name a successor in synch with his desire to cut financial regulation, lower corporate taxes, reorder fiscal policy, and possibly impose some of the constraints on the Federal Reserve that Republicans in Congress have long advocated.”
As it appears, Donald Trump could be adding John Allison as Treasury Secretary, and Allison’s values may be an example of Trump’s future Federal Reserve Chief pick. On November 28, Business Insider wrote that Trump had a recent meeting with John Allison, and they stated that Allison’s background includes abolishing the Federal Reserve and reinstating the “gold standard.”
Regardless, there are many top economists that think both ideas are extremely dangerous and downright impossible — and that Trump would cause the economy to become unstable by abolishing the Federal Reserve and/or reinstating the gold standard.
In the past, the idea of returning America to the gold standard has been eschewed by economists. For example, CNBC wrote on October 29, 2015 about what a gold standard reintroduction would mean to the American economy and stated Ted Cruz was not dealing with reality when talking about it during a presidential debate.
In particular, Ted Cruz was calling for an audit of the Federal Reserve, and stated this central bank should have “sound money and monetary stability, [and be] ideally tied to gold.”
Quoted was Adrian Ash of BullionVault who said, “[Reintroduction of the gold standard] is never going to happen… never on the terms that people are talking about anyway.”
They also quoted Nobel prize-winning economist, Paul Krugman, about the consequences of reinstating the gold standard, and Krugman was paraphrased as stating that, “One deterrent would be the large U.S. deficit, which would make it hard to maintain the currency link to the supply of gold. U.S. federal debt is currently above $18 trillion, up from around $400 billion in 1971 when Nixon severed all links to gold.”
Immediately following this, in November 2015, TIME wrote about the catastrophe that would ensue if the gold standard was reintroduced and quoted financial theorist William Bernstein stating the following.
“Your [stock investment] portfolio would become a lot more unstable, along with the rest of your financial life.”
On top of this, if the private, commercial banks have a crisis, the closing of the Federal Reserve would mean that inflation may rise and unemployment might not get capped. For example, after the bank crisis in 2008, the Federal Reserve issued more money and because they reissued this money, they were able to cap unemployment at 10 percent.
Alternatively, there is at least one opinion that the failed Gold Standard Act of 1984 might be a compromise for current opponents of using gold or precious metals to back all U.S. currency. Forbes wrote on December 1 that Jack Kemp’s idea “shows us how [using the gold standard] is done.”
Regardless, on June 16, NPR wrote that Trump said he favored reintroducing the gold standard, but few economist would agree with that. At that time, economist Dean Baker of the Center for Economic and Policy Research said returning to the gold standard was a “fringe idea,” but the Federal Reserve needed to be reviewed for the following reason.
“Our big problem [in] the last five years has been inflation has been too low. And the analogy I make is this is like prescribing chemotherapy for someone who doesn’t have cancer.”
Gold Standard fringe ideas aside, there are still some that think that these will be the last days of the 103-year-old Federal Reserve — especially if Trump causes a situation where there are financial stability issues in America.
On November 28, Business Insider wrote that up to 48 percent of American Republicans view the Federal Reserve negatively, and Elga Bartsch, the chief European economist at Morgan Stanley, was quoted stating the following about why they think the Federal Reserve is on its last legs.
“A prolonged period of exceptionally low interest rates has weighed on financial intermediaries’ [such as private banks, building societies, insurance companies, investment banks or pension funds] business models. Hence, financial stability issues… could turn out to be [the] final nail in the coffin of central bank independence.”
[Featured Image by Alex Wong/Getty Images]