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 the 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.