Return to the Gold Standard, Good Idea or Not?

Back to the Gold Standard, Good Idea or Not?

No BS Weekly Update 9/10/2012

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"Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon." -Winston Churchill

Dear ,

Return to the Gold Standard-Good idea or Not?

There has been a proposal by the Republicans for the US to return to the gold standard. At an emotional level my gut reaction is "that sounds like a great idea". Unfortunately it is an issue that I have no real knowledge of. I have never done the research. So I had a fascinating day of reading this weekend.

Now I could go into a lot of detail with all that I have learned but I doubt that is what most of you are looking for so I will cut to the chase as they say.
Before we look at could/should we return to the gold standard I think we have to ask ourselves:

To What Purpose?

Why do it? What are we trying to accomplish by returning to a gold standard? According to an article in Forbes, "The purpose of a gold standard system is to produce a currency of stable value". (http://www.forbes.com/2011/04/28/gold-standard-purpose.html)

By returning to a gold standard we want to limit the amount of monkeying around that the government can do with the currency. We want the government to stop printing money out of thin air and to start to live within its means.

OK, I Can Go Along With That

Theoretically the way that is done is by having a currency that can be redeemed at any time for the equivalent amount of gold or silver from the US Treasury. Some of you may remember the old Silver Notes currency that used to be in circulation. It was a dollar bill that allowed you to do just that, present it to the US Treasury for silver. The limit on the amount of currency in a monetary system being limited by the amount of gold and silver that the nation actually owned in its vaults.

Unfortunately, there are many cases in the world where theory and reality meet and they are not the same. We'll take a look in a minute and see if this is one of those cases.

So Now the Question Becomes:

Will returning to the gold standard accomplish that goal? One way that we might answer that question is by comparing how the US monetary system has worked when it has been on the gold standard and when it wasn't on the gold standard. You may be surprised to know that the US didn't actually implement a gold standard until 1873. So its not like the US had been on the gold standard since its inception until Nixon took us off in the early 70s.

In fact back in the 1850s the accepted currency in circulation in the US at the time guaranteed redemption in silver. Then in 1857 the banks unilaterally refused to redeem in silver. (A lot of this info came from Wikipedia. http://en.wikipedia.org/wiki/Gold_standard)

A Brief History of US Money

Dr. Chris Martenson has done an interesting DVD called Crash Course. I have referred to it in past seminars. You can find many of the chapters on Youtube.com. Crash Course: Chapter 6 - What is Money? , Crash Course: Chapter 7 - Money Creation , and Crash Course: Chapter 8 - The Fed & Money Creation are all worth watching but today I want to draw your attention to Crash Course: Chapter 9 - A Brief History of U.S. Money.

Crash Course: Chapter 9 - A Brief History of U.S. Money by Chris Martenson

I See Two Issues

I see two issues that lead me to believe that returning to the gold standard would not produce the desired results and therefore is not worth the effort. The first issue is that we as a country don't own enough gold and silver to cover all of the money in our system. In fact, according to this article in About.com:

"The U.S. does not even have enough gold, at current rates, to pay off the portion of its debt owed to foreign investors. For example, even when gold hit its peak price of $1,895 an ounce in September 2011, there wasn't enough gold for the U.S. to pay off its debt. At that time, China, Japan and other countries own $4.7 trillion in U.S. Treasury debt - but there was only $445 billion total in gold reserves at Fort Knox. (Source: U.S. Treasury Major Foreign Holdings of U.S. Debt; Office of Inspector General, Audit Report, September 2010)" (http://useconomy.about.com/od/monetarypolicy/p/gold_standard.htm)

So if we returned to the gold standard and just our foreign creditors presented all of their US dollars for redemption in gold, it would wipe us out.

The second issue I see is that it really doesn't stop the government from gaming the system anyway. They are the government. They can change the rules any time they want. So we take away the printing presses and they can't print any more money. Did that stop President Roosevelt in 1934? No it did not. On January 31, 1934 with the stroke of a pen President Roosevelt changed the price of gold from $20.67 an ounce to $35 an ounce. In the blink of an eye people saw 40% of their life savings wiped out. How is that much different from what would have happened if he had had a printing press? So much for a safe storehouse of value.

All Hat and No Cattle

So in the end, I think that this idea is another case of All Hat and No Cattle. If it were to pass I think it would cause a massive disruption in the system and at the same time it would give our citizens a false sense of security that the government could rip away at a moment's notice. So while my initial reaction was great idea, after doing the research I'm afraid I don't think it is a very good idea.

Until next week , Protect Your Wealth!

Sincerely,

Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain(CNBC)

RF: Now that the August European vacation month is past, the problems in Europe are again front and center. As things are collapsing in Spain, people are actually taking their money and leaving the country. Imagine what that must be like. The country you have grown up in has "suddenly" become so unstable that you rush to the bank in a panic, withdraw all of your money and flee the country, leaving your home and most of what you own behind.

At least that is what those that have any wealth are doing. The rest are left to go down with the ship so to speak. Could this happen in the US as well? Think not? I'll bet the Spaniards never thought it could happen to them either!

Economists: US Debt Burden Could Match That of Greece by 2021(Moneynews)

RF: As I've written repeatedly, the US is just Greece and Spain waiting to happen.

US Government Debt Hits Record $16 Trillion(AP)

RF: And based on this article it seems we are determined to get there.

FedEx Slashes Forecast, Citing Weak Global Economy(AP)

RF: Always keep an eye on shipping in its various forms. If product and paper are moving, look for improvement. If falling, look for weakening.

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