Ron Paul Gold Standard is an Impossible Dream

Many pundits and readers of PolicyMic continue to support and preach the benefits of restoring the gold standard as a fixed asset backing our currency.

They note that the gold standard provides a self-regulating and stabilizing effect on the economy. The government can only print as much money as its country has in gold. This discourages inflation, which is too much money chasing too few goods. It also discourages government budget deficits and debt, which can't exceed the supply of gold.

In addition, more productive nations are directly rewarded. As they export more goods, they can accumulate more gold. They can then print more money, which can be used for investing in and expanding these profitable businesses.

Yet the history of the gold standard quickly brings into the spotlight both its strengths and its liabilities in today’s global economy.

In the mid-1800s, countries across the globe wanted to standardize transactions in the booming world trade market. They adopted the gold standard, which guaranteed that any amount of paper money could be redeemed by the currency's government for its value in gold.

This meant that transactions no longer had to be made with heavy gold bullion or coins. It also increased the trust that was needed for a successful global trade, since paper currency now had a guaranteed value tied to something real. This worked so well that, by World War I, most countries were on the gold standard. Despite a few recessions, it worked pretty well until the costly war began.

The world went off the gold standard in 1914 because the powers of Europe needed to print more money than the gold standard would allow in order to pay for World War I. The gold standard reappeared just after World War II as part of the Bretton Woods agreement. The idea was to avoid the international monetary chaos of the interwar period, particularly the Great Depression, by tying currency to gold. Unfortunately, only the U.S. dollar was actually convertible to gold; other currencies were pegged to the dollar. The system relied upon the U.S. government acting in a fiscally responsible manner. The Bretton Woods agreement meant that central banks had to maintain fixed exchange rates between their currencies and the dollar.

They did this by buying their own country's currency in foreign exchange markets if their currency became too low relative to the dollar. If it became too high, they'd print more of their currency and sell it. Even though the dollar was still worth 1/35 of an ounce of gold, most countries no longer needed to exchange their currency for gold. The dollar had replaced it. As a result, the value of the dollar increased --- even though its worth in gold remained the same.

The strong dollar led to inflation and a large balance of payments deficit in the U.S., which in turn helped to create stagflation. The U.S. started to deflate the dollar in terms of its value in gold to curb double-digit inflation.

In 1971, gold was re-priced to $38 per ounce, then again to $42 per ounce in 1973. As the dollar devalued, it motivated people to sell their greenbacks for gold. Finally, in late 1973, the U.S. government decoupled the value of the dollar from gold altogether. The price of gold quickly shot up to $120 per ounce in the free market.

Once the world dropped the gold standard, countries began printing more of their own currency. Inflation usually resulted, but for the most part abandoning the gold standard created more economic growth. However, gold has never lost its appeal as a currency of real value. Whenever recessions or inflation looms, investors return to gold. By 2011, the price of gold was over $1,600 an ounce.

While the history illustrates the benefits of the gold standard, it also illustrates why it has so often been left behind - ravenous government budgets, particularly when that hunger is fed by an emergency such as a war or severe economic distress in the form of a recession.

Today many well-intentioned politicians, led by Ron Paul, are promoting a return to the Gold Standard. There are many obstacles to this proposition, yet one remains paramount: the United States doesn’t hold enough gold in reserves to even pay off its foreign obligations, let alone to support the currency as a whole!

When gold hits its peak value of $1,895 an ounce in September 2011, the U.S. didn’t hold enough in reserves to pay its obligations to China, Japan, and other countries that totaled $4.7 trillion in Treasury debt. The United States, when valuing it at $1,895 an ounce, holds an estimated at $445 billion total in gold reserves at Fort Knox.

Several gold standard supporters claim that the United States could return to its former monetary basis by simply increasing its reserves. This claim, unfortunately, has no basis in fact.

On January 1, 2012 “Business Insider” reported that 165,000 metric tons of gold were estimated to exist worldwide. Valuing that total at $1,600/ounce, the total price rounds off to $9 Trillion. To put that number in perspective, the United States National Debt was effectively $9 Trillion prior to the onset of the Great Recession in 2007 and is now quickly approaching $16 Trillion.

No matter the history of success or the benefits the gold standard delivered to the U.S. and Global economy as a whole, the very limitations of gold as a resource prohibit it from ever again being used to guarantee the value of currency.