Archive for May 21st, 2012


Currency: No Return to Gold Standard

During the Republican debates, Congressman Ron Paul went off the deep end as to the currency, advocating a return to the “gold standard.” As Newt Gingrich suggested forming a commission to look into bringing it back, Herman Cain argued the nation needed to focus on the “sound money” virtues of gold and silver.

None of these Republicans however could possibly have been serious about the currency. While there are potential problems in the uncontrolled printing of money, based on nothing more than a faith in the strength of the Federal Reserve, returning to gold or silver to back up the currency, is certainly no answer.

The principle problem with gold and silver is their quantities are finite, and as the population grows faster than the metal supply, money becomes scarce, adversely affecting economic expansion.

During the Presidency of Andrew Jackson, the population grew at a rate far greater than the available precious metal supply, causing many to advocate paper money. Jackson, however, was hostile to the idea, and insisted on remaining with gold and silver. When he ordered federal agents to accept only gold or silver for the sale of public lands, banks were already down to only 1 gold dollar in reserve, for every 10 paper dollars, and his 1836 decree triggered an inflationary spike in prices and interest rates, and caused the value of the dollar to drop.

The inadequate supply of currency arose again when President Lincoln had to circulate paper Greenbacks to pay for the Civil War. Since the Treasury had been selling gold to anyone who wanted to buy it, by the time Grant took office in 1869, the money supply was depleted. When Congress proposed a bill to add a paper currency, Grant vetoed it, triggering the Panic of 1873. The Greenback Party (1874-89) emerged to push for a paper currency.

While President Hayes continued to allow the exchange of gold coins for the paper Greenbacks issued during the Civil War, he wanted more silver and paper money, but there was not enough gold to back it up, so he vetoed a bill that would have required the Treasury to coin certain quantities of silver each month.

The mint finally started increasing the supply of silver coins, under the Silver Act of 1893, signed into law by President Harrison. As the price for silver fell, currency manipulators quickly exchanged it for gold, and drained our gold reserves.

A Special Session of Congress was called to repeal the Silver Act as soon as President Cleveland took office in 1893, but he refused to abandon the gold standard, and gold reserves continued falling, leading to the Financial Panic of 1893, and a farm depression.

When William Jennings Bryant proposed the free coinage of silver, President William McKinley again played it safe by defending the gold standard. He signed the Gold Standard Act of 1900, strictly limiting paper money redemption to gold.

It was not until 1934, during the Great Depression, and the administration of Franklin Roosevelt, when we finally moved off the gold standard, by replacing it with the full faith and credit of the Federal Reserve Bank. The final nail in the gold standard coffin came in 1971, when Republican Richard Nixon completely cancelled the right to convert dollars to gold.

The gold standard is dead. It died 78 years ago. While there is a risk of printing too much paper money at the Federal Reserve, the solution is not to return to gold, the answer is to intelligently monitor the quantity of paper currency printed, and insure that the value of the Dollar is not diminished in the process.