Should the Government Reconsider the Gold Standard?

The United States has a weak economy, a national debt in excess of $16 trillion and more than $1 trillion in circulation. These unimaginably large numbers have inspired those in favor of “hard money” policies to call for a return to a standard based on gold. In fact, in 2012, while running for president, Newt Gingrich promised to establish a gold commission similar to the one put in place by Ronald Reagan.


The idea of the gold standard is gaining popularity among the average American as well, and this is largely due to growing concerns over the job market, inflation and looming problems associated with Medicare and Social Security. In simple terms, applying the standard means to set the value of the dollar based on the value of gold, which would limit the amount of money that could be in print.


Such an approach could solve many problems. However, the gold standard is not a panacea, and it has its own problems. Perhaps the most significant is that there simply isn’t enough gold remaining in the world to return to the standard, at least as it was. Furthermore, no country currently uses the standard, largely because it requires them to cede control of its money policy; it also makes it very difficult to maneuver during an economic crisis.


Opponents of the standard have a strong argument: The main allure of the standard is that it applies discipline, but this discipline can be achieved other ways as well. For instance, Congress could put into place a framework for determining how much money can be in print. The advantage of the current system, however, is that the U.S. can adapt its policies to domestic and global economic conditions. The downside to this flexibility is that it gives the U.S. just enough rope to hang itself.


Discussions about a return to the standard often have the inherent assumption that gold is stable, but that isn’t necessarily the case. Gold can be lost and hoarded in quantities that are large enough to have a significant effect on a local economy and even the global one. There is also the matter of governments controlling the price of gold, which can keep it out of the hands of the private sector.


Just prior to 1933, gold in the U.S. was valued at $35 an ounce because that was the price that was set by the world governments. Governments have a long history of setting price on currency because that is what allows them to make corrections. However, when an entity has a large stockpile of gold, or any resource, and then is able to dictate that the value of the stockpile, it provides them a considerable amount of power that could have a devastating effect on world economy and relations.


There is little argument that the gold standard could provide a fix now, but debate usually concerns the long-term ramifications. There are, however, persuasive arguments, such as that made by Steve Forbes at the Freedom Summit, that the U.S. could achieve an effective modern standard by approaching it as guideline for the value of the dollar rather than as a rigid determinant. It is within this middle ground that the great potential for the gold standard, such as reduced fluctuation of the dollar, is most evident.


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