Unless you’re a Ron Paul enthusiast, you may have missed it among the relatively few minutes he has been given in the seemingly endless number of Republican debates; that is his call for the abolition of the Federal Reserve and a return to the gold standard. Other politicians, including more recently Newt Gingrich have made similar calls as have economic and monetary experts from across the globe.
But, is a return to the gold standard a realistic possibility, and if it is, does it even make sense? If the larger concern is the unchecked capability of the central banks to print fiat money (read: worthless money), would a return to the gold standard do more harm or good for the global economy? While it’s not yet the “hot button” issue that will decide the Presidential election, the debate is sure to intensify as the fiscal crisis that is currently enveloping the world threatens to strangle the economy.
The Case for a Gold Standard
Gold standard advocates believe that such a move would bring stability to the value of the dollar and restore the world’s confidence in our Treasuries. More importantly, it would restrict the activities of the Federal Reserve Bank including the unbridled printing of money which, they say, has led to the tremendous debt that is crushing the country. Without the ability to print money, the federal government would be required to limit its spending.
Their contention is that, if the gold standard was still in place we would never have gone through many of the financial crises of the last several decades, such as the oil embargo of the 1970s; the rampant inflation of the 1970s and early 1980’s, or the housing bubble. Likewise, what they view as irresponsible fiscal policies, such as bank bailouts and deficit spending, would have been unnecessary.
The Case Against
Gold standard opponents don’t necessarily disagree that there needs to be more stability currency valuation. But, they see a return to the gold standard as being too restrictive at a time when intervention in monetary management is needed, such as the financial crisis, or during the Great Depression.
Original opponents, those that cheered the decoupling of gold from the U.S. dollar in 1974, initially touted that the ability to manipulate the quantity and value of the dollar would reduce the possibility of deep recessions, keep employment higher, and produce sustained economic growth. It was also promised that a devalued dollar would increase our competitiveness in the international arena and reduce our trade deficit, all while keeping inflation in check. Unfortunately, none of that actually happened.
Not only did we experience two of the worst recessions (1980, 2008) in our history, we experienced more recessions since the loss of the gold standard than at any time in our history. Our trade deficit has worsened and the value of the dollar is worth 20% of what it was in 1974. The only thing a devalued dollar has brought us is spiking oil prices, which have wreaked havoc on our economy and people’s pocket books. And, because money can now be created out of thin air, our country is over $100 trillion in debt (including unfunded entitlements) which can never be repaid.
The Reality
While the loss of the gold standard, by most accounts, may have contributed to the current fiscal and economic malaise, its return may not be the sensible solution that the gold bugs advocate. It’s a completely different world today than it was in the 19th and 20th centuries. In a true global economy, driven by free trade and digital commerce, there’s too much disparity in productivity rates, inflation rates, and savings rates, among other factors that would make adherence to a gold standard virtually impossible.
A return to the gold standard would require that all countries involved in trade get on board with a singular goal or policy target of creating a stable currency. And there would have to be the mechanisms in place in order to achieve the goal. The problem is that, a gold standard, as with any monetary system, would still be vulnerable to the inherent flaws of human nature. Is it really possible to have all of the world’s politicians and in some cases, tyrannical leaders adhere to a system that requires honesty and commitment?
From a more practical standpoint, a return to a gold standard may be physically, economically, and politically impossible. There isn’t enough gold in the world to back the amount of money that is in circulation. If all of the U.S. dollars – those in circulation and those held in reserve by foreign banks, not to mention those tied to Treasury debt – were convertible to gold, as the standard would require, the price of gold would necessarily have to skyrocket to thousands of dollars per ounce. While that might make gold bugs (such as Ron Paul who owns millions of dollars of gold stocks) happy, it becomes economically and politically impractical.
The political reality is that some governments are not likely to willingly give up their power to manipulate their own currencies, which for now, is their only weapon in combating trade deficits, fighting inflation, or financing their debt. For the U.S., the ability to devalue its dollar is, for now, the only way it can stay above water in its spiraling indebtedness.
Gold Standard or Not, It’s Time to Act
While there may not be any consensus on the virtues or practicalities of a gold standard, something has to be done, and it would be in the interest of the U.S. not to lead from behind on the issue. First, it was the U.S. that unilaterally transformed the world’s monetary system when it abandoned the gold standard, and second, we actually have the most to lose should the world act to right the ship without us.
The world is already responding to a devalued and largely unstable dollar by increasing their gold reserves. Many countries, including China, Russia, and Brazil are calling for a new currency reserve to replace the U.S. dollar. If that were to happen, the gold standard would be adopted by default. It would be calamitous for the U.S., as the dollar would lose much of its value and the U.S. would lose its position as the world’s economic power.
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