Back in the early 70s, I moved out to the state of Oregon. While living there I decided to try my hand at panning for gold. At the time, the shiny yellow metal was bringing a price of thirty-two dollars an ounce. It never became what you would call profitable but was a fun hobby that got me out into the great outdoors. An old fella who lived just down the creek from my place was a little bit more serious in his efforts. He ran his sluice box, a short chute with riffles on the bottom of it. He would shovel scoops of creek bottom into the top of the box. The riffles would trap the gold as the creek water ran down. He claimed that he made about $4,000 a year and offered to sell me as much gold as I wanted! When I told my first wife at the time about the opportunity, she patently declared it a waste of money. In retrospect, that was bad advice. But I digress. Reflecting on that missed opportunity got me to thinking about when America was on the gold standard. I wondered why we ever went off of it. It’s an interesting story.
When America was on the gold standard, the monetary system was connected to the value of gold. In this arrangement the amount of money in circulation cannot increase without increasing the amount of value in the gold reserves. “Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check.” mentalfloss.com. From 1879 to 1933, a United States citizen could go to the bank in trade $20.67 for an ounce of gold. But, because of the Great Depression of the 1930s with its massive unemployment and deflation, the governments hands were tied in attempts to bridal that deflation.
Consequently, President Franklin D. Roosevelt’s administration made an initial move to get off of the gold standard in 1933, We
“…completely severe[ing] the link between the dollar and gold in 1971.”
This resulted in something called a Fiat system in which the dollar is not connected to any particular asset. In his book, Lords of Finance, author Liaquat Ahamed states that “Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold…,” until 1971 our government continued to allow foreign concerns to trade dollars for gold, at which time President Richard Nixon end of this practice in an attempt to protect are dwindling gold reserves.
Arguments have surfaced recently from Libertarians supporting the reinstatement of the gold standard. Their criticisms are based on a mistrust of the Federal Reserve system. As it stands today, in an attempt to boost our economy more paper dollars can be printed. Remember, this is possible because our dollar is not associated with any specific asset. An argument follows that “…the gold standard ‘forces the U.S. to live within its means,’ said investment strategist Mark Luschini.” Luschini compares our system to a credit card where you can spend money without assets in the bank. He describes the gold standard as allowing you to spend only money that you can back with assets.
However, going back to the gold standard would prevent the Fed from countering recession.
“If the output of goods and services grew faster than gold supplies, the Fed couldn’t put more money into circulation to keep up, driving down wages and stifling investment.”
Considering we now have in circulation around $2.7 trillion, it would require 261,000,000 ounces of gold to cover that amount. The value of an ounce of gold would have to be around $10,000 an ounce, which would create massive inflation. For that reason alone, whether we like it or not, the Fiat system is what we have.
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