Myths and Realities of Returning to a Gold Standard

Posted on by The INO.com Team

By Terry Coxon, Casey Research

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public's consciousness.

I'm happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I've noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let's take a closer look at what it really means. It's not that complicated.

What Isn't at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn't been the source of all mischief.

I've heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn't.

The legal-tender laws are usually part of the story, but the story doesn't hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don't like it, you can avoid it by declining to accept anyone's IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government's claim that it owns "dollar" as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark "Chevy" and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn't alter that situation or expand the range of your choices.

I've also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It's quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn't redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).

What It Wouldn't Fix

A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.

A new gold standard wouldn't be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve's ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.

And a return to a gold standard wouldn't ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we've seen, a gold standard adopted one day can be abandoned the next.

What It Would Fix

Now that we've dampened expectations, here's what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.

Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn't prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn't.

With a fiat money system, you don't need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money's purchasing power. The years-long lag between printing and the effect on prices makes deception easy.

If you print more money this year, well, it's only a temporary measure and only because of the recession you're trying to avoid. Next year, you'll slow down the printing or maybe not print at all – you'll have to wait and see what conditions are next year. And don't forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there's always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You'll think of something.

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.

With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.

The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.

Terry Coxon is one of several big-picture analysts at Casey Research who sift through today's cultural, political and economic trends looking for clues as to when and how they might shift... because those shifts hold strong profit potential for bold investors. To enjoy more articles like this, as well as to receive specific, actionable investment advice including when to buy or sell specific stocks and shorting stocks, among other things, sign up today for The Casey Report. A ninety-day trial is completely risk-free.

22 thoughts on “Myths and Realities of Returning to a Gold Standard”

  1. To all the persons that commented this essay: do you any of you have an opinion as to what gold extraction is doing to the environment - our environment, our shared environment? Gold, nor silver nor printed bills can be eaten - you still have to trade them for products that are safe and abundant and of low cost that should be found in the environment.

    Would love to know what you all think...

    1. Nancy,
      Have a look at radioactive isotopes from Japan's Fukushima nuclear disaster that turned up in bluefin tuna caught off California in August. The 15 fish that were tested contained 10 times the background levels of radioactive cesium, including a short-lived isotope that the fish must have absorbed while swimming in contaminated waters near Japan before migrating east across the Pacific. The melt down containment is beyond the ability of the Gov and current technology available today. A high magnitude earthquake will be the end of Japan. Soon food along with gold silver and fiat paper will not be edible.

      1. Justin Case, I know of this issue, horrible, just horrible.

        I am still hoping some economic analyst will reply to this request... Anyone? Is it that difficult?

    2. I'm all against any polluting process to extract gold. The less gold they get, less will be on the as a world market thus higher prices. Humans has to be accountable to their irresponsible actions. People need to see the planet as a whole. Side effects like the Fukuchima disaster is a crime against humanity.... Radio active tuna on our coast, how pathetic...

    3. When we have quit polluting in other things as well, I think we can focus more on precious metals. As you may know, gold is found most often in rock that is mined for copper and lead, so it's not like gold mining is wrecking the planet all by itself.

      With the economy in the shape it's in, I do not protest the mining of gold. Gold and silver are tangible assets with industrial as well as monetary value, If I wanted to protest something, it would be the horsepower race we are in right now. We need to get back to smaller fuel-efficient vehicles, like we had in the late 70s. These huge behemoths on the road now are a national shame. Some barely get as much mileage as my long-ago ride, a full-size 1987 Cadillac.

      The cost is what it is. It's the price we conspicuous consumers pay for modern living. I do not fall for all the Green-worshiping either. More important is ensuring we have enough natural resources.

  2. The author clearly points out why a gold standard will not work, but fails to mention the fact that we don’t own enough physical gold to back every dollar now out there.
    There is always enough gold, or any other commodity, it has to be priced at the amount of dollars circulating. If the expanded monetary aggregate (money supply) were to be properly reflected in the price of gold, its price per ounce would be somewhere between $10,000 and $15,000 easily. So the hack argument is put forth on occasion. The rebuttal is that the torrid growth of new money without basis would justify a gold price almost ten times higher, at which point the shortage of gold would not be so acute.

  4. Another time not within living memory is when the US government actually controlled its own currency. It's not the government creating the money, it's the Fedral Reserve, which is privately owned. By whom? Not the citizens of the US, who dutifully fork over "interest" on our "national debt" to privately owned banks. The guys with the trademark on the US dollar actually live in places like Switzerland and have last names like "Rothschild".

    This is why the corporate media won't cover Ron Paul. I still remember a couple early primaries, where he placed well, and you heard the news reports about who finished first, second and fourth. No real worries about the election, however, since the votes are counted electronically. Who needs a paper trail? We do. But not paper money, thank you.

  5. Ask the creater of the gold liberty dollar if you can barter in gold. He's facing jail time for doing so.

  6. Sorry but the big BANK Cartels will never allow it .How are they going to make there interest from nothing ,not even a piece of paper ,just a amount GENERATED on a computer.
    Ask yourself how much GOLD is realy in the VAULTS of the FED and diffrent Country's RESERVE BANKS .Why do you think GERMANY is calling on GOLD RESERVE OF
    ITALY ,SPAIN ,IRELAND ,GREECE .PORTUGAL
    The vaults are BARE.
    Where is all the GOLD ?
    It is in CHINA and INDIA and OIL producing COUNTRIES . One day they will not accept paper greenback ,pound euro any more . Then you will have WORLD WAR III .

    1. The vaults are BARE?
      Do you have evidence that this is a fact and not your opinion?

      1. Just ask yourself when last was a Audit done on the FED and Fort Knox and you have the answer.
        Just as pressure has been applied on the Fed by U.S .Rep. Ron Paul to agree to an audit of U.S. Treasury gold held at Ft. Knox and West Point, Germany may have to break the rules, too, by stonewalling the country’s elected representatives on the matter of its gold reserves.
        Read more: http://www.beaconequity.com/german-bundesbanks-incredible-gold-scandal-2012-03-07/#ixzz1wylz8AOl

        Find out how many tons do Bank of England hold compare to 20 years ago .
        http://www.beaconequity.com/german-bundesbanks-incredible-gold-scandal-2012-03-07/
        Try and get and invetory of Phisical Gold holdings in Reserve Banks of the World . Why does Germany want all Gold reserves of Ireland , Spain , Portugal and Italy and Greece ,is it to stop them leaving EU and start printing there own money again ?
        http://www.spiegel.de/international/germany/debate-breaks-out-in-germany-over-foreign-gold-reserves-a-833289.html

        http://thedailybell.com/236/Gold-reserves-more-important-than-before-says-Bundesbank.html

        1. A lot of questions and suspicion but no hard evidence. It's likely that the gold was leased out in the 80's to raise the value of the USD. 15 - 20,000 tons possibly. US may not have Germany's gold either. The big heist was likely through rail out of the trade centre before the demolition. But no smoking gun.
          Germany wants collateral not promises. Why should those bankrupt countries keep assets if they need fiat? Think you could pull that off with a bankruptcy in N/A?

  7. An interesting essay - thank you. But where is the economic cost of the damages to the environment for extracting gold? I live in Baja California Peninsula in Mexico. We have a great standard of living, water, food, stable middle class and heathly coastline. For the past 2 years we have been fighting open pit mining operations with investors from Canada, USA and others because - I can only suppose - of this belief that gold will hold other countries economies in place. We are only one of many places in the world with this threat. When will economist that offer subscription to their valuable knowledge include the environment - our shared environment - in their analyst??? Thank you in advance for considering to do this starting today! We desperately need it.

    1. If you realy want to do some research on damages to the enviroment ,look at the the underground water on the Witwatersrand in South Africa .All the old Gold and Coal mines that has been filling up that is now poluting the ground water .You can not use it for irrigation for food ,you can not drink it .They are now paying the price in South Africa .The big mining houses are walking away from there resposibility and nobody say anything.

  8. A gold standard is what is needed at this time, if for no other reason than to hold our government officials accountable for their irresponsibility in printing and spending. The Federal Reserve should be disbanded in addition. The reserve has managed to "muck" up the economy at least as far back as Greenspan. I remember a recording of Greenspan saying that he was sick and tired of the "fake wealth in America" and that he would burst the market bubble. He did.

    1. The author clearly points out why a gold standard will not work, but fails to mention the fact that we don't own enough physical gold to back every dollar now out there.

      Then, rampant counterfeiting has to be dealt with. It's happening as we speak.

      By watering down the gold or silver content of coins, we can take the temptation out of counterfeiting.

      1. Tommy G, I stated what we "should" have, a gold backed dollar. Does anybody in their right mind think our government will return to it? No. Then you state there is rampant counterfeiting....... and it's happening now? So you think it will increase with a gold backed dollar? I don't get your point. By watering down gold and silver in coins, it will take temptation away from counterfeiting? What?

  9. What to expect next...
    How about a bran new world currency based on Gold?

    1. Absolutely agree! The NWO is creeping its way forward as stealthily as ever, just as the people are as ignorant as ever of its true intentions.

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