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Gold Standard: Is it Coming Back?
Pinnacle Digest writes: Republicans are meeting in Tampa to nominate Mitt Romney and - besides establishing the party platform - determine its official position on the gold standard.
At this time the Republican platform is not recommending a return to the gold standard, but does advocate a commission to consider the possibility.
The reality at this time is that the general idea, among most economists, is that the gold standard would be a step backward for our modern monetary system -- the equivalent of trading in an automobile for a horse and buggy. Schiff reminds these economists that paper money has been around for centuries and has always ended in ruin.
At the time of America's founding, the uses and abuses of paper money were well understood. Having just experienced the horrors of the Continental currency (which had been used to finance the War of Independence), America opted to limit Federal monetary powers to coining money, which for legal tender purposes they defined as gold and silver.
The rest is history and as a result of that wise choice, the national economy thrived, and eventually became the richest on earth.
In contrast, since the time that the gold standard was abandoned in 1971, America has become the world's largest debtor nation and is now teetering on the brink of financial ruin.
Just as the War of Independence forced governments to print huge amounts of money, creating massive inflation, in 1971, the Nixon administration was forced to make a decision under huge pressure to continue expanding the money supply. As commitments to the Great Society programs, the war on poverty, the Vietnam War and the Space Race drained what tax revenue was available, Nixon faced a politically difficult decision.
Schiff explains that this led the government to print lots of money, thereby hitting Americans with large doses of inflation. General prices had by then tripled from the levels seen in 1932. But the price of gold had been held at 35 dollars per ounce. This led America's foreign creditors to exchange their paper dollars for gold (It was illegal for American citizens to do likewise). This created a drain on US gold reserves, and if something were not done, it was likely that the U.S. would lose all of its reserves. As China and other central banks buy record amounts of gold while the USD remains the world reserve currency, history appears to be repeating itself.
In conclusion Schiff states that:
Staying on the gold standard left the government with only two options. One was to devalue the dollar and raise the price of gold consistent with the increase in the CPI. That would have required a gold price of over 100 dollars per ounce. Alternatively, the government could have removed the excess dollars from circulation, bringing consumer prices back in line with 35 dollar gold. In other words, the choice was devaluation or deflation. Neither was politically appealing, and both would have brought deficit spending to a halt.
If the Fed and Obama keep running deficits and printing money, the CPI will explode. With the money supply in the stratosphere, devaluation will be the only way to escape our debt burdens. How high would the gold price have to be set for a successful devaluation of the dollar (if a return to the gold standard took place)? How high would gold have to be for its price to be consistent with the CPI, which for years has been running above the stated numbers? That is the real question.
The gold standard forced the government to responsibly confront irresponsible fiscal policy. If the Republicans can stomach the reality of a true free market and gain enough political support along the way, the gold standard just might come back again. But don't hold your breath.