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Follow the yellow brick road?

Returning to the gold standard becomes a campaign issue

Created date

August 23rd, 2011

What s the best way out of the nation s economic doldrums? Some believe our best bet is to simply follow the yellow brick road. That s right, the one made famous by L. Frank Baum in the classic children s tale The Wonderful Wizard of Oz. Baum s story has been called an allegory of U.S. monetary policy in the early 1900s with the yellow brick road as a symbol of the gold standard. The message is clear: Follow the yellow brick road and prosperity is on the horizon, but would returning to the gold standard offer a solid solution or is it just another fairy tale? The gold standard links the supply of money to the amount of gold the country has in reserve. It was the prevailing U.S. monetary system from the 1800s until 1933. Tying currency to something that is universally valuable ensures the value of the dollar and, in theory, limits the amount of money the government can print to ensure that value does not fall. As the 2012 campaign season heats up, some candidates are suggesting that a return to the gold standard is the boost the American economy needs to prevent inflation. The issue is popular among GOP and Tea Party candidates with Rep. Ron Paul of Texas and former New Mexico governor Gary Johnson among those championing the policy. In a May 2011 interview with Human Events, a leading conservative news source, businessman and one-time presidential candidate Steve Forbes said that he believes the U.S. will return to the gold standard within five years because such a move would strengthen the dollar. If the dollar was as good as gold, Forbes said in the interview, other countries would want to buy it.

Why gold? Why now?

This wave of interest in gold comes amid widespread fear about the future of the dollar and the possibility of high inflation, says Larry Elkin, president of Palisades Hudson Financial Group LLC in Scarsdale, N.Y. Advocates of the gold standard worry that the Treasury will simply run its printing presses until the dollar is worthless, leaving citizens with no way to buy goods. Rep. Paul, a long-time proponent of the gold standard, says, If our money were backed by gold and silver, people couldn t just sit in some fancy building and push a button to create new money. They would have to engage in honest trade with another party that already has some gold in their possession. Dr. David Robison, chair of the economics department at La Salle University in Philadelphia, sees it differently. The gold standard is widely misunderstood, says Robison. Most people think that the gold standard implies that there is a dollar s worth of gold for every dollar bill in circulation. But that was never the situation. Robison says the government determined a formula or a multiple of dollars linked to our gold holdings. For example, if the multiple was six, for every $1 billion of gold in reserve, the government circulated $6 billion of money. The theory of the gold standard is that the government cannot just create dollars as seems possible under the Fed system that we currently have, says Robison. However, the government has the power to change the multiple, so it can create money from nothing just as under the Fed system. For example, the government could change the multiple from 6 to 7 and create lots of additional money. Advocates of the gold standard have valid concerns about the way our money supply is currently being handled, says Elkin. By overspending, this country has accumulated a mountain of debt that it may be unable to pay off without debasing our currency. However, the solution is not to switch to metallic money, but rather to use paper money more wisely.

A fix or a fantasy?

Utah recently enacted a law allowing businesses to accept gold and silver coins in lieu of federal currency, and Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont, and Washington are debating similar actions. Only time will tell how viable and accepted these moves turn out to be. As Americans grow increasingly frustrated by the endless stream of discouraging economic news, many are considering what would have been unthinkable options just a few years ago. Whether a walk down the yellow brick road will get the country inside the strong greenback fortress known as the Emerald City is debatable that Americans are tired of waiting for their happy ending is not. A good monetary system requires that the supply of money be controlled, but it also requires that the people who control it do so responsibly, says Elkin. The problem with our current system is not that the government can control the money supply, but that the government controls it badly.