By: Clay Wyatt
With lingering economic turmoil in the US and a national debt that is rising to the tune of millions of dollars per minute, the case for a change in our monetary system has risen. Our current fiat (paper-based) system is backed by nothing but your belief in it and is strongly opposed by many for various reasons. Should the US Return to the Gold Standard?
With this in mind, some have called for a return to the gold standard. Should the US take this drastic step?
A primary benefit to the gold standard is that it reduces inflation as compared to paper currency. Inflation acts as an indirect tax, as it reduces the value of existing currency, thereby taking wealth from those who hold it, such as savers and investors.
To get an idea of how this works, if you placed $10,000 under a mattress in 1971 – the year that the last link to gold was broken in the US – and decided to use it today, it would now be worth just under $1,780 in real dollars. In other words, the dollar today is worth just 18 percent of what it was in 1971.
Under the gold standard, this would have played out much differently. During the period of the classical gold standard (1880 to 1914), the average rate of inflation was 0.1 percent. Using this figure, that same $10,000 that you placed under your mattress in 1971 would now be worth just under $9,600. In other words, you wouldn’t have been punished much for simply delaying your spending.
Money is currently printed out of thin air. The Federal Reserve (which is only federal in name), does not have to back currency with a commodity. Thus, the Federal Government has much more leeway in terms of deficit spending, financing wars and other questionable activities than it would under the gold standard.
Wealth is effectively confiscated from society and given to those who print the money in our current system. Former Fed Chairman Alan Greenspan once wrote, “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process…”. To some, this is known as financial repression.
Under the gold standard, the supply of money is limited to the gold that backs it. This acts as a check on government spending, as money can not be printed at will under such a system.
Not Enough Gold?
It has been argued that there is not enough gold to serve as a monetary base. However, some argue that the free market will determine the purchasing power of gold, which would solve this problem.
Some mainstream economists argue that increasing the money supply can help combat economic recessions. With the gold standard, this would not be feasible.
Of important note is that the gold standard would likely limit the boom and bust cycles that are experienced in our current system, which could make this a relatively moot point.
The Bottom Line
These are just a few of the arguments in favor of and against reintroducing the gold standard in the United States. Those who are in favor of interference by the Government and the Federal Reserve will likely favor the status quo. Those who are in favor of letting things play out as they may and who seek a major change to the status quo will favor getting rid of our current system in favor of the gold standard or some other commodity-backed system.
What’s your take on this issue?