The ever-decreasing power of the dollar has made many an advocate of the gold standard and in-fact many want to return to the gold standard as a monetary system. Over the past 2 years alone the purchasing power of the dollar has decreased 30%. In the exact same time frame, the price of gold has increased by over 100%. Throughout this paper I will try to prove why the use of the gold standard in modern day society would not be better than paper money thru various analysis and logic.
Definition of the Gold Standard
What exactly is the gold standard? The gold standard is a monetary standard under which the basic unit of currency is defined by a stated quantity of gold. Typically this standard was used in the 1800’s into the early 1900’s as a means of currency. This currency today no longer exists; our current currency is called the fiat system, which is merely paper money that is printed in to existence.
Using the gold standard in today’s society would be ludicrous; totally changing the way governing bodies would be able to conduct business. The gold standard is not a good monetary system for this day and age, though proven to be more stable in someway it lacks the ability to be readily available as the paper money is, in addition to acting as a line of credit to the government when needed. In order for the gold standard to exist, gold would need to become a fixed price commodity or asset. All debt that the government has would need to be paid off and the paper money would have to become inconsistent. The return to the gold standard would inherently deplete the worlds gold reserve because the amount of paper money in circulation in comparison to that of gold is not evenly yoked. “Not to mention the increasingly numerous proponents of a gold standard persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Again, heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.” (1) “With unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. However, the restrictions of gold convertibility would profoundly alter the politics of fiscal policy that have prevailed for over half a century.” (1) “In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a gold standard has become an issue that is clearly rising on the economic policy agenda.” (1)
The Constitution of the United States explains that the gold and silver standard was to be the only currency per the constitution. Figure 1 is the exact verbiage found in the Constitution of the United States, which at no point prohibits the printing of un-backed paper money.
"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
Figure1: Article I, Section 10, Clause 1
Historical Gold Overview
From 1833 – 1890 the price of gold was approximately $20.65 per ounce of gold. This price only fluctuated roughly $0.01 in these 57 years. From 1891 to 1930 the price of gold was approximately $21.32 per ounce. With this being said from 1833 to 1930 the price of gold ranged from $20.58 - $21.32 per ounce.
During the great depression (1931) the U.S. economy took a turn for the worst, the price of...