Return to Gold Standard?

While perusing presidential candidates and reading their stances I noticed that Michael Badnarik, according to wants to return to the gold standard and thus halt inflation.

Does the US have anywhere enough gold to do this? Wouldn’t it be like a rollback on the value of the economy?

Going onto the gold standard does not mean that you have to use gold coins for every transaction. It just means that money – particularly currency notes – will be exchanged for gold on demand by the government.

Right, I understood that. But the government has to be able to provide gold for every US dollar in circulation right? I was under the impression our Gold stores were no where near enough to make such a promise.

That might depend on how a country returned to the gold standard. I suppose that the government could be required to have enough reserves of gold to match all the paper money in circulation. But I think it would be more likely that you would assume that not everyone would want their gold at once, and that in a currency emergency the government could acquire gold from other sources (e.g., from the central banks of other countries) to cover the temporary demand.

Paper money, at least in America (and I believe this is inherent in the definition) is described as “notes” – meaning that the government is signing this certificate of its indebtedness to you for the face value of the note, just as (in theory at least) you can go talk to your friendly banker and sign a note acknowledging your indebtedness to the bank, in return for which signature he gives you money – expecting to collect it back, with interest, when the note becomes due.

I’m too lazy to Google out the statistics, but something like 99% of all present U.S. currency is in Federal Reserve Notes – notes issued by the Federal Reserve Banks to serve as currency. A small fraction are United States Notes, issued in $5 and $100 denominations (and I think they’ve been discontinued as new issues) in which the U.S. Treasury and not the FRB is the issuer. And a vanishingly small percentage are silver and gold certificates in the hands of collectors.

When I was a kid, something like 20% of the circulating currency was silver certificates, but for reasons that will become obvious, neither public nor private sectors wanted them to stay in circulation.

What’s a silver certificate, or for that matter a gold certificate? Well, if currency is notes the same as your note to the bank (or an IOU for that matter), it involves a promise to repay. What does the government promise to repay? The face value of the note in – more money! But it itself is legal tender, the standard of currency. So in one sense the notes back themselves, and in another, the sole thing backing them is the credit of the United States as a nation – by using Federal Reserve notes, you are accepting the idea that the U.S. government is going to be around and functioning, and honoring its debts, for the foreseeable future – a reasonable assumption for the U.S., but not so reasonable for the People’s Republic of Coupsylvania – whoops! I mean the Etat de Coupsylvania – whoops! – the Interim Military Government of the Democratic Republic of Coupsylvania…

However, a silver certificate was a $1 bill, or a $5 or $10 or whatever, for which the United States solemnly promised that on demand they would give you $1, $5, or $10 worth of silver, which was a fixed weight of silver metal, a fraction of an ounce. Likewise, before 1935 or so, the country had gold certificates where it promised to give that amount of gold to you on demand.

Well, there were three problems with this. First, this bound the government to hold a given amount of silver or gold in reserve to guarantee that it would be able to redeem its certificates, something that tied its hands figuratively in terms of money management. Second, Gresham’s Law applied – “bad money drives out good” – because which would you rather hang on to, a secured note that you can take to court and take ownership of the collateral if the debtor defaults, or an unsecured note where his word is your sole guarantee? So people sat on and hoarded the secured certificates and got rid of – spent – the unsecured notes, effectively reducing the money supply. Third, by tying the value of a piece of currency to a fixed quantity of precious metal, the silver and gold certificates had a deflating effect on the currency. Plagued over the last 65 years by inflation, that sounds good – except that deflation is associated with recessions and depressions, which are Not Good Things.

I would have to see the specifics of the proposal, but even if a small fraction of American money is tied to a precious metal, and there’s some effective way to keep it from vanishing from the marketplace through hoarding, that fixes the value of money relative to gold – hence, the gold standard – because a $20 bill is a $20 bill, worth $20 at today’s prices, whether it’s secured by Olveta Culp Hobby’s signature or 0.002 oz. of gold in Fort Knox.

The “standard” part of “gold standard” is a misnomer. In particular, it in no way shape or form can “prevent” inflation, deflation or debasement of currencies.

To take an extreme example. A huge lode of gold is found in Senegal. Easily extracted and more total gold than in vaults in the rest of the world combined. Poof, all your gold certificates are worth half as much. Senegal is suddenly fabulously wealthy. This is a crazy way of running the world’s economy.

Secondly, in everyday gold value there are significant runs up in down in value. Some companies need to buy gold since they actually use it for something useful. It takes a surprisingly small amount of money to make metal markets zigzag. Remember how close the Hunt’s came to cornering the silver market? Again, another crazy way of running the world’s economy.

Polycarp makes some excellent points about this. Especially note that there just isn’t enough precious materials to actually add up to the current money supply of the US. Having money being in unnaturally short supply was for a long time a major impediment to US economic growth and going off the gold/silver standards was a Really Great Thing.

Having a large amount of the US currency based on such a volatile material such as gold would lead to a huge barter economy. People couldn’t trust what a dollar was going to be worth in a week. So you buy a car with 5 unopened boxes of plasma TVs, etc. Not a good thing in terms of encouraging investment.

I strongly suspect that columnists who urge going onto the gold “standard” again either:

  1. Don’t understand basic math.
  2. Have a lot of money tied up in gold and are trying to manipulate the market to their own advantage.

It really is one one of those “do the math” things.

The only problem with unbacked currencies is stupid politicians. E.g., running up trillions of dollars of debt. But you can easily fix that by voting them out of office. (One would hope anyway.)

What Polycarp and ftg said. Retaining a gold or silver standard was necessary as long as governments didn’t understand that they couldn’t just pay all their debts by printing notes. The actual presence or absence of bullion imposed a measure of reality. Once the difference between money and wealth sank in, governments could regulate their money supply to a level optimum for their economies, which isn’t possible if the money supply is linked to a physical asset one has limited control over. Since the 1930s anyway, most governments have at least some idea of how to maintain the value of their legal tender (though I remember the Latin American hyperinflation of the 1980s), and people have grown to trust legal tender. Also, without a gold (or silver) standard, gold and silver have become at least partially “demonitized”: they can be bought or sold like any other commodity, but don’t translate directly into money.

“Returning to the Gold standard” is a hallmark of the tinfoil hat brigade. "Nuff said?

Over the century or so following the Spanish conquest of Latin America, this sort of thing actually happened. Plunder of the New World, followed by extensive mining, greatly increased the money supply resulting in significant inflation.


From here. Honestly, when are we going to find another entire continent filled with gold? Yes, every ounce of gold that is mined acts as inflation, but compared to the total existing gold, yearly additions are insignificant. (digging up data on this, will post when found)

Please define “surprisingly small.” I don’t think that the Hunts did their work with a “surprisingly small” amount.

Also, from the same cite:

70% in 30 years also seems pretty drastic. I belive the dollar has lost approx. 90% since 1900, but can’t find a cite right now.

For clarification: wouldn’t the amount in a gold standard be a fixed ratio? If so, the USG could say that one oz. of gold is equal to (number of dollars in circulation)/(amount of gold held by USG), no?

Hunt-style runs are possible on currencies as well. Recall George Soros vs. Britain. I will grant that the dollar in the FOREX markets is fairly stable. To be sure, over the past 5 days, there’s been about a 2.3% difference in the price of cash gold (high and low prices) while the dollar index has had a 1.5% difference. The local gas station fluctuates more.

I strongly suspect that columnists who urge going onto the gold “standard” again either:

  1. Don’t understand basic math.
  2. Have a lot of money tied up in gold and are trying to manipulate the market to their own advantage.

It really is one one of those “do the math” things.

Agreed, but that’s a big problem. I don’t recall any giant swings in the economy dependent on gold prices the way we’ve seen the Fed printing bills over the past few years though.

Are there any nations in the world that are still on the gold standard?

Because of International Monetary Fund demands, I believe everybody got off any form of the gold standard in 1978.

Nitpick: Gresham’s Law was stated originally, and it only applies, in the context of the king (or central government) issuing two different currencies of two different values, and then declaring that they are freely interchangable. (That is, people are obligated to accept the bad money at par with the good money.)

If the market is allowed to operate freely, good money tends to drive out bad. When this happens in the real world, you have citizens of third-world nations trying to get American greenbacks because the local money is toilet paper.

This is probably tangental to this thread as a whole, but I’m sick of seeing Gresham constantly misquoted.

Returning to the gold standard would probably destroy the American economy.

First off, as I just mentioned in another thread, the total value of the US gold and silver reserve is less than $100,000,000. So if we went back on to the bimetal reserve, that’s how much money there would be (if you try to seperate money from currency in something like this it’ll never work).

So the entire economy, which currently has a total value of around $9,000,000,000,000, would experience a huge deflation as it shrunk to fit the new money supply. Losing over 95% of the money in the US economy would have a “disruptive” effect.

After everything was all settled, you presumedly would have a supply of new gold dollars whose purchasing value was approximately equal to what you had in paper dollars. But the deflation would mean that you’d have a lot less money in terms of face value. Your annual salary might only be $400 and you might have $200 in your savings account. But you’d be able to buy steak at five cents a pound and a new car for $300. So your new income and spending would balance.

Except for one thing. Most people owe money. Fixed amounts of money. And the lenders that hold these notes aren’t going to want to discuss the fact that the value of a dollar has dropped. Your bank is going to tell you your monthly mortgage payment is still $500 a month and they don’t care that that’s more than you make in a year (or that the resale value of your house is now $3000).

Even if you’re one of the few who don’t have any outstanding debts (or are one of those who debts are owed to) you don’t get off the hook. The government has been issuing bonds for years so it owes debts to bondholders. And when they face the same payment crisis I just described they’ll be looking at taxpayers like you as the solution to the problem.

Gold 1900: 18.96 USD/troy oz. from here

Gold 1971: 40.62 USD/troy oz. from ditto

Gold 1987: 447.00 USD/troy oz. from the same source
This would be the highest year average price pre 2001. For year after 2001 I can’t be bothered to locate average prices.

At this point the US dollar was worth 18.96/447.00 = 4.2% of the 1900 Dollar and 40.62/447.00 = 9.1% of the 1971 Dollar relative to gold (what that translates into in terms of purchasing power is not a question I’m qualified to answer).

Gold Now: 406.10 USD/troy oz. from here

Same calculation shows: 4.7% of 1900 dollar and 10.0% of the 1971 dollar relative to gold. The same disclaimer as to the purchasing power applies.


The USG could say that it would exchange your dollars for gold at this rate. But given that the total value of gold owned by the YS governement is ridiculously low by comparison with the amount of dollars circulating, it would exchange, say, 50 000 dollars for an ounce of gold (random, not real figure…you’d have to do the maths to know excatly what would be this rate of exchange). But with your 50 000 dollars, you could buy 100 ounces of gold on the market, so it would be a totally stupid move to actually ask for this exchange, hence it wouldn’t change a thing. Nobody would actually exchange his dollars for gold worth 100 time less.
If you want a gold standard, the dollars must be exchanged for their market value in gold. Say, 500 dollars/ ounce. But the US governement doesn’t have enough gold, by a long shot, to back all the dollars with gold at the market rate (I’m not sure it would if it owned all the gold existing on the planet). So, the amount of dollars circulating would have to be reduced drastically (say, 50 times, or 200 times or 1000 times, I wouldn’t know) to match the amount of gold owned by the US government (maybe the governement could actually keep much less gold than needed, on the assumption that not everybody is going to ask for an exchange, hence keeping more dollars in circulation, but for some reasons I suspect it wouldn’t please the advocate of the gold standard).
Such a drastic reduction of the amount of money circulating would a cause a deflation on a scale never heard in the history of mankind. I can’t even imagine how they could actually proceed to remove from circulation all this money. When it would be done you would have only incredibly tiny amounts of money available (the value of the gold owned by the US goverment) to use for all transactions which amount for a vastly, vastly higher value (the value of all products, services, etc… exchanged in the whole USA). If for instance all the american companies have to pay their employees at the end of the week, and there’s only 1/100th of what they need to do so in existing bills and coins, what could they do? The only thing I can think of is paying you with their products. You would get vacations certificates if you’re a travel agent, or tires if you worked in a tire production plant. Practically, you would get back to a barter economy, exchanging your tires for bread with your neighbor working in a bakery.
In practice, an informal money would eventually appear, because a barter economy just can’t work. People would use for instance cigarette packs or somesuch. Of course, meanwhile the US economy would have totally collapsed due to the massive deflation. Or some people would begin to issue private bills and coins (not backed by anything except that confidence in the issuer, like the dollar today) which would be used as money. You’ll be back to the starting point, actually using a “fiat” currency, with the only difference that it’s not anymore issued by the government. When I think of it, the most likely solution would be that people would use foreign currencies, which offer more guarantees than privately issued money or cigarettes.

Lacking the creation of such an alternate money (the government forbid the use of anything else than dollars for transactions, for instance) , I assume that at some remote point in the future, things would eventually adjust, the value of gold would rise enormously since american people would desperatly need money for their everyday transactions, and essentially every ounce of gold available in the world would be shipped to the USA. At some point, the value of gold woud probably rise enough for its value to be equal to the amount of money actually needed for transactions. Let’s say, this ounce of gold would be actually worth 50 000 dollars. Or (it’s the same thing actually), it would still be worth 500 dollars, but you could buy 100 times more stuff with one dollar.
But what good would it do for people owning dollars? None, because the value of gold they could get in exchange for their dollars would be totally arbitrary and only due to its use as money. In other words, this gold would be only a representation of value exactly in the same way a paper dolar not backed by gold is. It would be worth that much only because people accept it for this value. They would end up with gold (or dollars which can be exchanged for gold, same thing) that is accepted for a given value only because people know that other people will accept it for this same value. Exactly like the current bills and coins. If someday people don’t wan’t to accept this gold/ gold-backed bills anymore at this artificially inflated value, you would be in the same situation than if tomorrow people don’t want anymore to accept the current dollars. Owning worthless ludicrously tiny amounts of gold instead of worthless non gold-backed dollars.

And for an end result which would hence be “exactly like before”, you would have ruined the USA in the process during the adjustment period.

Clairo and Nemo: Those are both well-reasoned (and sensible) arguments. I don’t disagree that returning to a gold standard would be an extremely disruptive event, but let me get this straight:

Essentially what is being said is:

  1. the gold standard kept the economy of the US from growing (or at least growing as it did after the gold standard was finally removed)

  2. Because the econonmy couldn’t grow, there was essentially no inflation (or very limited, see comment on mining additional gold), but once the gold standard was replaced with a fiat currency, growth could occur on an unprecedented scale

  3. Economic growth necessarily = inflation. Greater economic growth = greater inflation.

  4. Debtors have an interest in inflation. (Can we say that in order to stop the debts from being called in and destroying the debtors, the government has allowed inflation to continue at a high pace to keep debtors afloat?) It appears to me that there’s an implication that debt is driving the ecoomy. I.e., if we (as a company) want to expand, we have to take on debt. Expansion, on a national economic level, requires inflation as additional money is created. Are inflation and debt (or debt and inflation) necessarily related?

  5. Since going off the gold standard (which has allowed the economy to grow), the economy has grown/inflated such that it simply cannot be put back onto a gold standard without risking/causing tremendous deflation?

Slight nitpick…

According to this site, the Treasury–specifically the Bureau of the Mint–holds $11 billion dollars worth of gold, against which the 12 Federal Reserve Banks collectively hold an equivalent value in Gold Certificates. I remember seeing this figure in books twenty years ago, so I imagine the gold is not being accounted for at its market value, but probably at its value some time in the past, like when the dollar was floated.

It doesn’t invalidate your point, but it is a few orders of magnitude we’re talking about here, so I thought it was worth mentioning.

That’d be cool! I could actually buy something with this Lousiana Purchase nickel that I got in change today.

So why does Badnarik want to do it?

From an interview in the “Free Liberal” magazine website: