The Ramifications of a Modern Gold Standard

Republicans got the financial analysts of the world all worked up over one of their platform proposals – a return to the gold standard. It’s a proposal that has been championed by Ron Paul for decades, but the last time there was major action on it was during Reagan’s gold commission in 1981. Now, House Representatives are supportive of going back to a world of sound money … and the movement is strong enough to have made it into the national campaign platform and caused a media meltdown.

The idea of a gold standard is presented as three parts nutty and one part “fringe” solution to the nation’s economic problems. It’s clear mainstream analysts don’t take it seriously, but the ramifications of a return to a gold standard are no laughing matter.

No More Federal Reserve Games

For the financial world, the big threat inherent in a gold standard is an end to Federal Reserve games. You can’t inflate the money supply year over year and deliver billion-dollar bailouts when you have to pay up in hard metal. All the usual Fed activities – Quantitative Easing, Operation Twist, expanding the money supply – would be dead in the water.

Average folks might not be too affected – you already can’t get a loan, credit at a decent rate, or a wage that keeps up with inflation. Bankers and Wall-Street types? That’s another story. Their whole livelihood depends on the movement and manipulation of fiat currency and paper investments. There’s not much you can do with a piece of gold – it doesn’t readily translate into derivatives, trading algorithms, or other complex trading vehicles. Anyone asking for physical delivery or demanding to see hard asset reserves calls the bluff of an entire industry – so naturally the Wall Street talking heads on TV aren’t very supportive of this new Republican idea!

Some call a return to the gold standard a nightmare because it would mean “the end of banking as we know it.” However, who would really cry over the end of modern banksters? Not the millions of consumers they’ve hit with fees, near-zero investment returns, and negative savings rates. Only Wall Street weeps for Wall Street.

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An End to Deficit Spending

One of the criticisms that the banking industry levels at a gold standard is that it limits the government’s ability to respond to economic crisis situations with deficit spending moves. When you’re on a gold standard and you’ve overspent, you have to settle up the hard way. There’s no more governmental license to spend like the sky’s the limit, because there’s only so much money to go around. In a word, a gold standard means living within your means. For the bureaucrats of this world, nothing could be more painful.

That’s not to say that it wouldn’t be painful – in the short run – for those who benefit from government largesse. The faucet would get turned off pretty fast for many of our nation’s social programs and military spending initiatives. However, as the system worked itself back into balance, worthy initiatives would be restored, while most of the fluff we’ve blown billions on in the past would finally die out.

Real Value Over Time

The last key ramification of a gold standard would be a return to money with real value over time. Analysts on TV already contrast prices with the phrase “in today’s dollars” to mark that our currency has declined over the years. Under a gold standard, that phrase would be unnecessary, since today’s dollars would have the same worth as yesterday’s dollars and tomorrow’s dollars on a fixed system.

For savers and smart stewards of their money, this would be an undeniable boon. You wouldn’t have to worry about your money’s value eroding the longer it sat in your wallet. Instead, it would be possible to build up a store of sound money and honest wealth for retirement, rainy days, or owning property. The government bureaucrats could fuss and holler, but their shenanigans wouldn’t undercut the money in your pocket.

The economy we’re living in today has shown that fiat money and paper promises aren’t very good for real people. Sound money is better, and a gold standard is one way to get there. The Republicans may be getting a lot of criticism for their gold standard proposal, but at least the idea is back in the limelight where it belongs.