April 2, 2012

The Gold Standard

We look at the debate over the gold standard and what it means.

“There should not be a central bank. We don’t need paper money. What we need is a gold standard in this country.”

Shelby: It is being mentioned on the campaign trail, in state legislatures and, just last week, by the head of the nation’s Central Bank, who is definitely against the gold standard.

“There’s an awful big waste of resources. I mean, what you have to do to have a gold standard is you have to go to South Africa or some place and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank in New York.”

Shelby: So, just what is the gold standard?

“Pretty much what it was, was backing up our currency with gold. So, before the fall of the stock market, you could — instead of having paper money — if you wanted to, you could exchange it for the right amount of gold.”

Shelby: In the early 20th century, the government had to set aside a certain amount of gold for every dollar it printed. This limited how much cash was in our economy. During the Great Depression of the 1930′s, President Franklin D. Roosevelt started separating our currency from gold. The reason? So the government could print more money to pump into the sagging economy and give it a boost. President Richard Nixon finally severed any remaining ties between gold and the dollar in 1971.

We now use fiat money, which means the actual paper the money is printed on is worthless and coins are not made from precious metals. But if our money isn’t backed by gold anymore, then what is it based on?

“The basis for any coin or currency that doesn’t have an intrinsic gold or silver element in it, the basis for the value of that is really trust.”

Shelby: That is right. The value of the American dollar is based solely on trust. Let’s say you earned $20 last weekend for babysitting or mowing the neighbor’s lawn. You are then trusting that $20 will still buy $20 worth of stuff when you go shopping next weekend.

That trust has been working for almost 80 years now. So, why are we having a debate over the gold standard today? Well, Ron Paul and a few economists believe that if the government can just continue to print money with nothing but people’s trust to back it up, prices will rise faster than what people earn. That is called inflation.

“The dollar doesn’t go as far as it used to back in the day.”

Shelby: The fear is the dollar’s worth will drop and eventually no one will trust it anymore.

“If our government continues to flood the economy with millions and millions of dollars causing inflation and the degradation of the U.S. currency and its value, then, yes, I do believe that this is going to be a problem. And the only way to stop this problem is by adopting the gold standard.”

Shelby: Pegging the dollar to a commodity, something that actually has its own value and can be traded, would restrict the power of the government to print, circulate and spend money whenever it wanted. But it is that flexibility that most economists say is necessary to keep our economy healthy. They say the federal government needs to be able to print more money to kickstart the economy during downturns, like the last few years. Plus they say the gold standard is just not practical. Globally, about 167,000 metric tons of gold has ever been mined. That is equal to only about 13% of the world’s wealth. So, there is not enough gold to actually use as a currency.

It seems unlikely the U.S. would adopt a version of the gold standard or use some other sort of commodity to back up U.S. currency. And there are many still unanswered questions about how an economy the size of this country’s could make the switch.


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