Why Returning to the Gold Standard is a Bad Idea

It seems Republicans, during this economic crisis, want to take us foward by taking us back, way back in the day. In August of 2012, the Republican Party platform called for the establishment of a commission that would look into the possibility of returning the U.S to the gold standard, a policy the U.S abandoned in 1933 when the federal government ceased the exchange of bank notes for gold coins and effectivley confined the gold standard to the dustbins of history when Richard Nixon severed the tie between the U.S dollar and the price of gold in 1971, leaving the price of gold free to be subjugated by the forces of the market. A recent poll by the Univeristy of Chicago of the top economists in the U.S found out that a grand total of zero of them thought that it would be a good idea to return the gold standard, yet Reublicans still think it should be done. Supporters of the gold standard claim that it will curb infaltion as the Federal Reserve would be unable to print money in excess of the supply of gold. This, in turn, will stabalize prices in the market as prices would be unable to rise due to inflation. However, there is a reason no economist advocates for a return to the gold standard; it is impossible, impractical, and, frankly, outdated.

During the time the United States was on the gold standard, we experiecied a total of 26 recessions and 6 depressions. Since the U.S effectivley left the gold standard in 1933, we have experiencied only 19 recessions and 1 depression. Though the dollar has lost 97% of it’s value and purchasing power since 1913, we have seen unprecedented economic growth in the face of that depressing statistic. Why? Because paper money does not confine economic growth to the physical supply of gold. However, let’s assume that returning to the gold standard is what we should do to solve our problems, how would we do it? The answer is you can’t. The first problem is that there just isn’t enough gold in the U.S. The total worth of gold in the world is worth about $9 trillion dollars, with the U.S possesing $478 billion dollars of that gold, hardly enough to support a $15 trillion dollar economy that we currently have. If the U.S were to push ahead with returning us to the gold standard, the Federal Reserve would have to contract the money supply and halt the expanison of credit in order to match the supply of gold. This would cause deflation, discouraging the investment of capital and causing a recession. Busniesses would be forced to layoff workers and cut costs in order to adjust to the smaller supply of capital avaliable. However, let’s say we still wanted to do it anyways, how would we connect the U.S dollar to the price in gold. The answer is you can’t. When Nixon severed the tie between the price of gold and the U.S dollar in 1971, the price of gold has since been up and down. The U.S has since outgrown the price ratios of $20.67, $35.00, and $42.00 per ounce of gold. In order to re-establish that conncection, the U.S would have to artifically establish a high dollar/gold ratio. There’s one problem with that however; we are the world’s reserve currency. Surely any announcment that we were looking to return to the gold standard would immedietly increase the demand of gold, thereby raising the price of gold. Since we are the world’s reserve currency, the prices of goods and commodities would rise in porportion with the price of gold, causing widespread poverty and starvation as the value of currencies around the world would stay the same. Let’s say we tried to establish an artfically low dollar/gold ratio instead, what would happen then? The dollar would continue to lose value at a faster rate that it is today and there would be inflation, and a lot of it. However, let’s say we could magically solve this problem and get us back onto the gold standard, what then? Well, prices would be far from stable. When the U.S was on the gold standard, from 1919 to 1933, CPI inflation constantly flucuated between 25%, 5%, 0% and -15%. Only when the U.S went off the gold standard did CPI inflation begin to stablize. So why were prices and inflation flucating so much during when the U.S was on the gold standard? It’s because the value of gold is based on the physical supply of gold, and the physical supply of gold constantly changes as gold is traded, used for jewelery, melted etc. Since the value of the dollar would be tied to the value of gold, which is dependent upon the physical supply of gold, the value of the dollar would constantly flucuate based on the constantly changing supply of gold, which, in turn, causes market prices to constantly increase or decrease as the value of the dollar increases of decreases. Let’s say we locked up all the gold in Fort Knox and banned the use of gold by everyone except the U.S government, what would happen then? During a recession, the government, and the Federal Reserve in particular, would be helpless to prevent a recession or lessen the effects of a recession in the event that there is one, as they could not simply print money and inject it into the economy. The only thing we would be able to do would be ride out the recession and hope the miners could dig up some more gold. A return to the gold standard would also hurt the poor. In the event that the price of gold rises, and with it, the value of the dollar, the prices of goods would fall too. Sounds good right? Wrong. Gresham’s Law would begin to take effect and companies would be less willing to part with thier valuable bank notes, meaning salaries would drop, but debt would remain the same. As a result, people would have to work longer hours to pay back thier debts and make ends meet. If the value of gold drops, and brings with it the value of the dollar, then you get your typical inflation scenario where the price of basic goods rise but the currency would be so worthless that the poor will have to work longer hours just to accumulate enough currency to make ends meet. However, if you’re wealthy, you might have a lot of gold bars stashed away somewhere, and if the price of gold rose, then you’d probably make a lot of money. A return to the gold standard would also mean the end of the welfare state as we know it as the government would be unable to run a deficit by simply printing paper currency to pay it’s spending. No wonder why Republicans want to go back to the gold standard.

For the life of me, I struggle to understand why libertarians would ever support this “barbarous relic” that restrains economic growth to the supply of a shiny rock even though it contradicts their beliefs in capitalism’s ability to create an unlimited amount of wealth. Simply put, the gold standard is not the answers to the problems of our $15 trillion dollar economy, the true answer is paper money and it’s potential for unlimited economic growth, backed by the “good faith and credit of the United States”. The dollar may have lost 97% of it’s since 1913, but perhaps the real reason lies in the fundamental flaws of our Federal Reserve System, a private banking cartel who circulate money by buying up U.S debt and forcing the Treasury Department to pay interest on the currency circulated, effectivley meaning that every dollar in your wallet is backed by debt. The Federal Reserve is the problem, but a shiny rock taking the place of a central bank will not only fail to solve the problem, it’ll make things much, much worse (refer back to how Andrew Jackson destroyed the economy back in 1836 when he abolished the Second Bank). Maybe we should nationalize the Federal Reserve System instead. There’s an idea I don’t see thrown around that often.