Returning to the Gold Standard is a Return to Lunacy

Rand Paul and his father, Ron Paul, have many quotes and attributions stating they favor returning to the stable economic days when the United States backed all of its currency with either gold or silver.

I think before anyone jumps on this bandwagon to CrazyTown, we need to really examine the Gold Standard.

Gold and silver are like many things, they are commodities. Commodities have value because we, people, specifically brokers, assign those things "value." For example, we could use sand for currency, but that would be a bad idea. Sand is pretty much ubiquitous. For sand to have any value, sand would have to be protected, isolated, and sequestered in order to control the scarcity of sand. If everyone had sand, then sand would have very little value. If we control the amount of sand, then we control the value. We control the scarcity.

In 1805, the United States had considerable debt from fighting with the British. Gold and silver were in high demand since the U.S. didn't have the gold or silver to pay debts. People hoarded gold and silver as they saw the value go up. I'm sure some people even speculated in gold and silver, thinking that as long as the U.S. had a debt, the value of gold and silver would continue to climb.

Thomas Jefferson, in order to inflate the value of silver, told the government presses to stop minting silver coins. Scarcity drove the value of silver higher, and the market was manipulated by controlling the government minting of coins.

In 1857, more "manipulation" occurred as the U.S. struggled to find gold to buy more silver. Silver had become the preferred currency among countries for doing business. The hunt for gold created the Gold Rush and people headed West to discover sources of gold that could be sold to the government. The government would then use the gold to buy silver. The silver would then be used as currency by our country to pay debts to other countries.

Again, people would hoard gold and silver, as the demand for each metal would rise and fall, depending on what the United States needed to pay its debts.

World War I would come along and force countries to examine how to pay for war needs. European countries were boxed in, not having enough gold or silver to use in order to buy weapons. Some countries had already abandoned the Gold Standard. Others countries, to pay for World War I, went off the Gold Standard in order to run up some debt to pay for war supplies.

And therein lies the rub. Countries needed financial flexibility in order to pay for stuff they could not afford without incurring some debt. Having to constantly maintain a physical store of gold/silver to pay for stuff was very limiting.

Around the turn of the 20th century, most countries either had a Central Bank or were thinking about developing a Central Bank. A Central Bank would establish the value of paper currency, and control the amount of paper in circulation, thereby controlling the value of currency.

Essentially, a transference of value has taken place. Gold has no more value than that which we give it. It's really an arbitrary and artificial value. So the same for paper money. But, paper money is much more easier to come up with than gold or silver. More on that in a minute.

Value is Faith.

People around the world trust the value of the U.S. Dollar. And the value of the English Pound. And the value of the Chinese Renminbi. And the European Euro. They trust these currencies because people have faith that these currencies will be traded and accepted.

Now, more things about the Gold Standard to think about.

In order for Rand Paul's Gold Standard to work, he has to be able to control the supply of Gold. Again, supply is tied to value, and value is tied scarcity. If gold is commonly available, then gold cannot be worth very much, i.e. gold is not scarce.

When the U.S. was on the Gold Standard, personal gold was against the law. The average U.S. citizen could not own more than 4 ounces of gold. We can't have everyone owning gold, if gold is the Standard. In order to control the amount of gold in circulation, Rand would (a) have make the ownership of gold illegal, (b) and collect the amount of gold already in circulation. People must not remember that only after 1972, when Nixon finished off the Gold Standard, was the ownership of gold really made legal.

Gold markets can be manipulated just like any other market. Suppose China decides to flood the market with gold to undermine the value of U.S. gold value. Or Russia. Simply moving the U.S. to a Gold Standard does not make the U.S. financials immune to manipulation.

All countries currently use a Central Bank or Banks for moving currencies around. Germany, France, England, Italy, all have Central Banks. These banks keep money markets stable. While they may not seem stable now, markets could be much worse. All countries Central Banks know how to deal with financial markets, how to conduct country-to-country business. That is our global standard. Moving backwards to a Gold Standard would mean that all countries would have to figure out how to work with our finances. Not as easy as it sounds.

Furthermore, the U.S. is the world's most powerful economy. It is our currency against which oil is priced. If someone really wanted to upset global financial markets and create worldwide chaos, let him destabilize the current U.S. financial markets by changing all the rules of finance.

Gold and silver are also valuable commodities in the technology sector. Consider your smartphone, your laptop, your LCD monitor, every bit of technology you can think off. These devices contain precious metals, gold and silver, among them. How will changing the economy of gold and silver affect the cost of production of the most ubiquitous devices in human history?

In summary:

1. Ask Rand what he thinks about all other countries still using Central Banks. Will they have to return to the Gold Standard, too?
2. Ask Rand how he plans on controlling the supply of gold, and maybe silver. Will he make personal gold ownership illegal?
3. Ask Rand how he feels about manipulating the price of gold, and how that might affect the cost of materials in the Technology Sector.
4. Ask Rand how the Gold Standard is supposed to make financials more stable when historically the price of gold has undergone several manipulations.