Gold Standard Debate on the Right

One of my favorite economists and bloggers, John H. Cochrane, argues against the gold standard in today's WSJ.

Let's start by clearing up some common misconceptions. Congressman Ron Paul's attraction to gold, and Federal Reserve Chairman Ben Bernanke's biggest criticism, is that a gold standard implies an end to monetary policy and the Federal Reserve. It does not.
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A gold standard does not eliminate debt crises or debt-induced inflation. No monetary system can absolve a nation of its fiscal sins.
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Why not the old version? Most of all because the value of gold is poorly linked to other prices in the economy, which is what we want to stabilize. Fixing the price of gold today would do little to control the general price level. There are two big reasons for the disconnection between gold and other prices.

I mostly agree with Cochrane's criticisms, but still a support a return to the gold standard. Cochrane proposes inflation indexed bonds that would be tied to the consumer price index. He states that the purpose of monetary policy is to ensure price stability. Since gold is not well tied to the prices of consumer goods in the economy, he argues that it is a bad choice as a standard vis-à-vis price stability.

My objection to the current regime is that the federal reserve can manipulate the currency to the benefit of the big banks, in a largely undetected way. A gold standard doesn't fully prevent manipulation, but limits the scope of debauchery. To use Cochrane's own example, if the Fed issues more currency than it has reserves to redeem, it will eventually provoke a run on convertibility which will require a public devaluation. Such devaluations would serve as a public shaming that the Federal Reserve had mismanaged the currency.

Further, gold is tied to significant commodities that make a up key portions of the CPI. For example, gold and gasoline prices have shown a much narrower range of ratios than either commodity has to the dollar. Under Cochrane's proposal there is no reason to believe that either the bonds or the CPI itself wouldn't be subject to manipulation. Since Cochrane's proposal is "rule" based, I have no faith in it. The federal government and Federal Reserve has shown a disdain for what we would regard as rules. For example, we know that the Federal Reserve has loaned money to non-bank businesses who quickly put together an "industrial bank" and who would have been otherwise ineligible. While technically not a violation of the Code of Federal Regulations, this also shows a Fed that is operating well beyond its founding parameters.

There should be no doubt that a gold standard isn't going to bring nirvana. We have had booms and busts with or without the gold standard. Since going off the gold standard hasn't brought price stability or the end of booms and busts, and has undermined our faith in fair play in the economy; a return seem in order.