Wednesday, November 22nd, 2017 MST

Gold Standard not a panacea

With the national debt now exceeding $18 trillion and having jumped 70% in the last six years, there are many cries for a return to the gold standard, which, it is believed, would limit government spending that has resulted in the massive increases in the national debt.

A gold standard is a monetary system in which the circulating median (dollars in the United States) is readily exchangeable for physical gold, gold coins as it was in the US before President Franklin Roosevelt’s infamous April 5, 1933 Executive Order 6102 that ordered all Americans to turn in their gold coins (and bullion) in exchange for paper dollars at $20.67 an ounce.

Under a properly functioning gold standard, if the public perceives that too many dollars are circulating or that there is a tendency on the part of the monetary authorities to create too many dollars without a corresponding increase in gold it is likely that there would be a run on the government’s gold holdings as the public swapped their paper dollars for physical gold.  Supposedly, that would put a damper on the monetary authorities’ inclination on create too much money.

Governments do not like limits on their authority.  Such was in the case in 1933 when Roosevelt implemented Keynesian programs to bring the US out of the Great Depression.  So, FDR issued Executive Order 6102, which opened the door for many government spending programs that required massive creation of still more dollars and debt.  The national debt under FDR’s 12 years in the White House increased 11.5 times.

Here’s the problem with gold standards: governments are involved, which means that eventually the paper holders will get the short end of the stick.  FDR called in gold April 5, 1933 at $20.67 an ounce, but the following January the Gold Reserve Act raised the official price of gold to $35 an ounce, a 75% devaluation of the paper dollar.  Of course, effective with Executive Order 6102 by 1935 only foreign governments could redeem paper dollars for gold.

I and four others persons recently commented on the gold standard on Bill Martinez Live.  My comments are in the first podcast.  I recommend Joe Cobb’s comments in the second podcast. (Second interviewee in second podcast.)

Joe served as an economic adviser to Congressman Ron Paul and wrote the Gold Bullion Coin Act of 1985, which permits the US Mint to manufacture and sell American Gold Eagles and American Silver Eagles.

As one commentator said, and I agree, it is unlikely that the US will return to the gold standard.  However, if the government is forced–and it will have to be forced–to move to a monetary system that involves gold, don’t be fooled into holding paper receipts.  Go for the physical gold.

5 Responses to “Gold Standard not a panacea”

  1. Prime Investor

    The more the currency wars and trade wars intensify, the more likely it will be for the BRICs to surprise us with a gold-backed reserve currency or, at least one of their currencies could be gold backed.

    As the eurozone engages QE, I think we might as well be ahead of a new gold bull market. This is the first time I get this feeling since the crash in April 2013.

  2. Sam

    When people talk about backing a currency with gold, one wonders how much they have learned from history. This was a system that benefited bankers.

    Suppose instead of “backing the dollar with gold” the inverse idea were to be considered, that of “backing gold with the dollar.” In other words, monetizing an ounce of gold with a stable exchange rate in terms of dollars.

    For this to be effective, the rate would have to be set higher than the melt value, i.e. the monetized coin would be a token or in other words fiat form of money. The advantage is that the downside risk of holding the token money is reduced because of the intrinsic value of the metal (in that forming the coin requires energy and thus the coin represents stored energy).

    The failure of all previous token coins was the marked face value. As soon as the melt value of the coin exceeded the face value by very much, the coins ceased to circulate.

    This defect can be avoided by providing in the establishing law a provision for a market driven means of moving the dollar exchange rate upwards whenever inflation were to make the minting of the coins uneconomical.

    This relatively simple idea would provide a monetary way to hold money that would be inflation proof. It would change bullion coins from a store of value to a form of money.

  3. Bill Haynes

    Sorry, Sam, but your novel idea still involves a form of manipulation by central planners, which is the folly of any government-mandated money. Money is nothing more that deferred spending (savings), and a medium of exchange that can be saved if the recipient so desires. Gold and silver through out millenniums have proven to be the best ways of storing savings.

  4. Sam

    We both agree that gold and silver are the best way of storing savings. But gold and silver do not currently function as money. This problem should be corrected, but how?

    In any kind of effective commerce with gold and silver, one would have to use coinage so that the transaction could proceed by “tale” or in other words, the counting of coins rather than the laborious assay and weighing of the actual metal.

    So the question then becomes that of who mints the coins, private mints or a government mint? And does the minting operate on a free coinage model or a cost-plus model? Presently all mints do cost-plus. They take in raw materials and produce a product which must be sold at a profit high enough to cover their operating costs.

    When considering the problems bothering the United States at the moment, one must realize that some parts of the government are more troublesome than others. Lumping the US Mint together with all the rest of the badly conceived agencies does a great disservice to the people that operate the US Mint. Many people who are troubled by the US government in general will still recommend the accumulation of US Mint products.

    So the only thing that my “novel idea” does is to assign a monetary value to US Mint products. It can not be manipulated by the “central planners.” If there were an attempt to set the price too low, the Mint would not be able to profitably produce their product and would either have to sell at a loss or cease production.

    • Bill Haynes

      For small, day-to-day transaction silver coins would function efficiently. Pre-1965 US 90% silver coins are ideal, and that is why they were originally minted. However, as for who mints the coins, privately minted coins from recognized mints would work, but no really small (dime sized) private coins are presently being minted. Governments like to assert that only they can be trusted to mint specie, but privately-minted coins would be accepted. Who is going to turn down a Credit Suisse gold bar?

      For large transactions, say real estate traded for (purchased with) silver, 100-oz silver bars carrying recognized hallmarks would work.

      It is interesting that while most people do not trust the government in many matters, they readily accept that 1-oz American Gold Eagles contain exactly one ounce of gold.

Leave a Comment

You must be logged in to post a comment.