Ron Paul's Crazy Gold Standard Proposal

I like many of the stances of Ron Paul, currently in the U.S. House of Representatives for Texas and seeker of the Republican nomination to become President of the United States. I even agree with him on some of his critique of the Federal Reserve System. But his idea of returning to the gold standard for money is crazy, and it is important to understand why.

Let me begin by asking this: what would you think of a candidate that urged returning to the wampum standard? What do the gold standard and wampum standard have in common, and how are they different? What does the U.S. Constitution say? How does Ron Paul's proposal differ from the gold standard used in the 19th century in the United States? Finally, having covered that extensive ground, I

First of all, you should know that none of Ron Paul's ideas are new. They have been discussed by those interested in monetary policy since before Alexander Hamilton laid out the blueprint for the U.S. financial system (though he did not foresee the need for a Federal Reserve).

Wampum (see Wampum) is a kind of money made from sea shells that used to be used by Native American Indians. It had value because it was believed to have value. Like other forms of money, it could facilitate trade, lifting an economy above the pure barter level. While the shells themselves might have some ornamental value, mainly they were a symbol for work done. Much like a modern dollar bill. There were two problems with using wampum for money that would have shown up in a more trade-oriented, modern society. One is that there could be a shortage of wampum if not enough of the appropriate shells could be found. That could constrain trade. The other is that either too much wampum could be produced, or that it could be counterfeited. Then the value of wampum would fall relative to real goods; in effect, you can have inflation even on the wampum standard.

Gold (see Gold) is a metal used for ornamentation and other purposes; it used to be used as money. While more difficult to counterfeit than wampum, it had the same problems when used as money. It did not always prevent inflation. For instance, when the Spanish conquered Mexico and Peru, so much gold and silver was mined that there was inflation in Europe. In the 19th and 20th century, with major veins of native (metallic) gold mostly tapped out, there was not enough gold available to facilitate the rapid growth of commerce. With the introduction of modern methods of extracting low-grade gold ores a related problem arose: the high cost of producing metallic gold.

Even paper money is becoming obsolete; most money today is tracked electronically.

Ron Paul proposes to fix the problem of gold by allowing the value of gold relative to silver to float in value as determined by markets shows how far his mind has wandered from reality. This was a real issue in the U.S. in the 1880's. The Democratic Party, having lost the Civil War (it was the party of Slavery), tried to get back in power at a national level by changing the official silver-to-gold exchange ratio, as exemplified in (losing) presidential candidate William Jennings Bryan's famous Cross of Gold speech. The problem with gold and silver used as money lies not in their exchange ratio, but in the fact that the supply from mining varies over time and does not match the variation in economic activity.

So forget the gold standard.

Ron Paul does remind us that the U.S. Constitution does not clearly allow for paper money, much less authorize the Federal Reserve System. It specifically states in Article I, Section 10 "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." However, here "state" is specifically one of the states, not the federal government. In Section 8 it had already given Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;" which seems to give it the power to issue securities, which could be bonds, but has been interpreted as the ability to issue paper money. Why allow issuance of federal paper money and then prohibit the states from accepting it for the payment of debts? This issue was got around for a time by issuing paper money backed by gold or silver. As in so many cases, when the Constitution should have been amended, it was simply re-interpreted.

As to the Federal Reserve, I agree there are problems with it. It is supposed to allow for creation of a money supply sufficient to allow the economy to improve, but not so great as to cause inflation. But it is composed of bankers. Bankers are not like the rest of us. They have a long history of being far more sympathetic to the perceived problems of the rich than to the very real problems of the poor, the working class, and the middle class.

So sure, let's talk about reforming the Federal Reserve to make it responsive to all the people, not just the banks and Wall Street. Let us make it more transparent and find a way to hold those running the Federal Reserve System accountable. But forget the gold standard.

More data:

Ron Paul's Presidential campaign site