Despite the fact that President Richard Nixon unceremoniously and unilaterally moved the United States away from the gold standard in 1971, murmurs of returning to it have never quite died down. A committee was formed to reevaluate the situation as early as 1981, and members of the Republican party have proposed moving back toward a gold standard as recently as the end of 2012.
The traditional argument in favor of the gold standard is centered on stability—stability of the value of the money in your pocket and assurance that the dollar that you have right now will be able to buy you the same pack of gum today and next week and next month.
But is tying the value of our currency to gold really the best way to go about stabilizing it?
When the Republican party announced last year that calling for a commission to evaluate a return to the shiny metal would be part of their official platform, The Atlantic likened the idea to jumping off of the Brooklyn Bridge. And while that may seem like an absurd exaggeration, they also pointed out that zero percent of economists voted that a gold standard would be beneficial for the average American in a January 2012 poll.
So if economists (who should be look to as authorities on the issue) are so adamantly opposed to a return to the gold standard, why is it continually offered up as a valid course of action?
A New Standard
In a recent Forbes article titled “Here’s What A New Gold Standard Could Look Like,” Steve Forbes painted a picture of how the economy could operate if the US used a gold standard in lieu of fiat currency.
He began by pointing out that referring to “the gold standard” as a singular institution is not any more accurate than is claiming that only a singular version of democracy exists in the world today. The gold standard was different in the 19th century than it was in the 1920s than it was post-WWII, but the underlying principle of linking the value of currency to gold persisted.
Forbes then advocates for a new iteration of the gold standard—one that fixes the dollar to gold at a specific price, $X. If the price of gold were to rise above $X, the Fed could sell bonds (effectively taking money out of circulation) until the price settled at $X again. If the price of gold were to fall below $X, the Fed could do the opposite: buy bonds (which injects money back into the economy) until the price of gold returned to $X.
That extremely simplified model is supposed to demonstrate how an effective gold standard would function: it would be “stable in value and flexible in meeting the marketplace’s natural need for money.”
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