Owatanna, MN Correspondent-The United States should return to the gold standard. Going off the gold standard, along with several other changes in banking and monetary policy in the past 100 years, has led us to the financial precipice we stand upon today. Without returning to some sort of fiscal sanity embodied by a gold standard, we will likely see an unprecedented financial catastrophe in this century.
Since the creation of the Federal Reserve in 1913, the U.S. dollar has declined approximately 96% in value. There are two main causes of the dollar becoming nearly worthless in a century: fractional reserve banking and debt-based monetary policy. Each of these strategies led to the eventual abandonment of the gold standard.
Fractional reserve banking allows banks to lend out more money to the community than the actual value of their assets. This money is created electronically by the Federal Reserve and given to banks at low interest rates. The banks then lend this new money to individuals and businesses at higher rates. The banks earn a riskless profit by passing printed dollars from one party to another. Inflation results when the rate of increase in this amount of currency, or money supply, is greater than the supply of goods and services produced by the economy.
Inflation has averaged about 3.25% since 1913. This is the most insidious and detrimental tax on the average American because it reduces purchasing power to all workers. To me, inflation is one of the leading causes of modern families needing two earners just to stay financially afloat. Before we permanently abandoned the gold standard in 1971, supporting even a large family was relatively easy with one primary wage earner. Returning to a gold standard would severely reduce the use of fractional reserve banking and stabilize or eliminate inflation.
Debt-based monetary policy is only possible when government can print as much money as it wishes. This takes the place of government spending based on tax revenues, which used to be the normal way governments raised money. The greatest example of debt creation was the Great Recession of 2008-2009, when the Federal Reserve attempted to stabilize a critically overheated world economy by dumping trillions of debt-based dollars, not backed up by taxes or assets, into the economy. Because interest on this new debt must be paid, it’s in the government’s best interest to maintain inflation so the debt can be paid off with cheaper inflated dollars in the future. Returning to a gold standard would prohibit debt-based monetary policy because the government could only spend money it received from taxes or asset sales.
The primary reason to return to a gold standard is to reduce the length and breadth of financial recessions. Boom and bust cycles are innate to business. When the country was on an absolute gold standard (up until 1933), those cycles were short, and sharp, but healthy for the overall economy. Government intervention allowed by bailouts, printed money, and inflated dollars extends what would normally be healthy economic corrections into long, drawn out Great Recessions and Great Recessions that end up hurting the bottom 99% much more than the top 1%.
Prescott Valley, AZ Correspondent-Many believe a return to the gold standard would create more problems due to the complications involved with the current economy, but others consider a return to the gold standard to be a viable alternative to worthless paper money with nothing backing its value. A return to the gold standard or something similar would certainly give politicians motivation for reforming the welfare state, but between pressure from lobbyists, special interest groups as well as voters, the political class would continue to stonewall the inevitable. If these obstacles could be overcome, a return to gold money could be a reality.
In order to go back to a gold standard, there would have to be reforms at many levels. The federal government would have to cease inflating, balance its budget, and discontinue welfare programs. Most people would not be prepared for such reforms, and, again, politicians would be on the chopping block for even thinking about passing and implementing such measures. The hindrance to any monetary reform is the very idea or thought of it. The mere contemplation of drastic change is overwhelming to many, particularly when it comes to money.
Gold standard advocates agree that the methodology utilized to return to the gold standard must be part of a course of action of reestablishing gold as usable money within the current monetary system, while continuing to phase out the utilization of paper money, but still honoring existing money transactions in the system. Gold pricing and value would be an issue, as would any stated worth of paper currency.
There is also the matter of continuing inflation, which is of concern with the reintroduction of gold as a form of money, as everything in the marketplace today has risen in price, which includes gold. People’s usable income and savings have been worn down and are of less value. Gold standard advocates want to look at the money value of gold in different ways. Some want before inflation thoughts concerning gold to money ratios, while others want to raise the price of gold to an approximate figure, and others want to calm the waters with setting the current market for gold versus money ratio and reformulate the dollar value on that basis.
Reevaluating gold for money use is a complicated process because the buying power of gold has to be adjusted to equal out its worth as a currency in the present economy. In order to buy something of lesser value, gold coins of certain denominations and smaller increments would have to be minted and circulated for consumer use. Gold would be more stable money than most paper money, as government paper currency fluctuates whether its quantity is increased or decreased, as it attempts to meet the requirements of business and other pressures that make it rise or fall.
With a gold standard, there might be a minimal rise in cash prices particularly when the amount of gold used as real money increased, or if it were mined and processed, and there might be declines if gold used for money declined and amounts of gold were taken from the market to devote to industry, medicine, dentistry or jewelry.
Returning to the gold standard must be based on reintroducing gold and gold coins as money. This process would be handled in such a way as to not cause deflation and economic shock as well as allow for the completion of open government contracts and obligations to government bond holders. The transfer of gold would go from government holdings to private hands and would be turned into gold coins for public circulation. In order to accomplish this, the public, again, has to understand the process and what changes they as citizens would have to make in order for the standard to be effectively implemented. It would mean self-reliance and responsibility on their parts and the end of endless welfare state spending by politicians.
The gold standard could be realized with the removal of fear of the idea itself. If enough support and willingness were garnered to sacrifice for reform, there could be a swing from a paper and credit monetary system to one of gold without interfering with the normal flow of the market and production processes.
Myrtle Beach, SC Correspondent-We should have never left the gold standard! Does anyone know off the top of their head what a dollar is worth? A candy bar? A soda? A bag of chips? It’s so hard to value things when your money really has no value. But going back isn’t as easy as it sounds.
Going back to the gold standard would require EVERY store, EVERY business, ALL Government state and federal to re-structure pricing. This is not a simple endeavor. Also, I don’t see anyone wanting to give up their $35 dollars for $1, or somewhere around that. I just see it being a problem.
Sheffield, Jamaica Correspondent-The gold standard has been long abandoned since 1933. In this system, the value of a currency was determined in portions of gold. This currency could be exchanged. In cases where gold was needed, a trade could be made and paper money would be redeemed for gold. I was not around during the gold standard so I have no experience whatsoever, but basic research has it that this subject is debatable as it’s one that provides permanent or long-term stability in terms of economy and growth. In addition, this particular form of gold standard was said to have the capacity to put a halt to inflation and would decrease the size of Government.
Furthermore, the gold standard in some cases, to a minute degree, puts the Government out of business, as they’d not be able to print money due to a run of emotions or at their will. However, the debate to retract to the gold standard or similar does not only shadow the above merits but sheds light on the fact that this standard prevents or restricts the government from increasing the national debt . All in all, during the gold standard era, it is implied that the country ran smoothly in comparison to what we see happening today. Historically, the gold standard was measured to have performed best.
Should we revert to the gold standard? That depends strictly on where the country wants to be. I’ve personally never lived under such system, but people seem to want to live there. If it’s backed by popular demand, so be it.
Cartwright—Great concept, but this is not going to happen. It would be nearly impossible to return to the gold standard at this point without severely disrupting financial markets. The dollar is strong right now against other currencies and inflation is relatively low. Go back to World War I. The US had double digit inflation for a couple years. Same thing during World War II. It’s nice to say that the gold standard would eliminate inflation but that’s not the case. Economic history over the last hundred years or so doesn’t bear that out here.
I like the idea of having gold in Fort Knox and knowing that the dollar is backed by something other than the full faith and credit of the federal government but it’s not practical and never has been practical. The gold standard didn’t stop us from getting in two world wars, a war in Korea, and a war in Vietnam. It didn’t stop the federal government spending more and more. It didn’t stop entitlement programs and the expanding welfare or entitlement state.
What we need to focus on is the full faith and credit of the federal government. We need to start balancing the federal budget, paying off the national debt, and reforming entitlement programmes so that the unfunded liabilities don’t bankrupt us in the next couple decades. Some of these reforms take massive political action, which isn’t going to be easy. We need to ensure we have a vibrant, competitive economy that’s producing jobs so that anyone who wants to work can work. Having people working solves a lot of problems in America.
When it comes to the Federal Reserve, we need to let the FOMC continue to do its job in seeking maximum sustainable employment and price stability. I think they’ve done a good job for the most part if you look at their history. It’s a tough balancing act that they have. Where I think they could make some changes is to increase the reserve requirements of banks. This requires banks to retain more of their deposits and reduces their lending capabilities which force them to make more judicious decisions in the lending process. The financial crisis of 2008 could have been avoided had the reserve requirements been higher. Higher reserves are not a bad thing financially for the banks but it is very unpopular as it limits their lending ability. The higher reserve requirements take money out of circulation and curbs inflation. On net, I think higher reserve requirements contribute to a more financially sound banking system which is crucial to having a sound economy.