Ask an Economist

Regional Economist, October 2012 | Go to article overview

Ask an Economist


David Andolfatto is an economist and vice president in the Research division. He joined the St. Louis Fed in 2009 after teaching economics at Simon Fraser University in Vancouver and at other universities in Canada. He has been a visiting scholar in such varied places as Tehran, Budapest, Tokyo, Bogota and Cleveland. His areas of interest at work include macroeconomics, labor markets and monetary theory. In his spare time, he punishes his body with Insanity workouts and soccer scrimmages. For more on his work, see http://research. stlouisfed.org/econ/andolfatto/

Q. Why doesn't the U.S. return to the gold standard so that the Fed can't "create money out of thin air"?

A. The phrase "create money out of thin air" refers to the Fed's ability to create money at virtually zero resource cost. It is frequently asserted that such an ability necessarily leads to "too much" price inflation. Under a gold standard, the temptation to overinflate is allegedly absent, that is, gold cannot be "created out of thin air." It would follow that a return to a gold standard would be the only way to guarantee price-level stability.

Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made "out of thin air" to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. …

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