The Coin Analyst: Should the U.S. Return to the Gold Standard?
By Louis Golino for Coin Week
August 15 marked the 40th anniversary of the end of the gold standard. In 1971 President Richard M. Nixon ended the convertibility of the dollar with gold, which paved the way for the system of floating, fiat currencies that exists today.
Ever since then the U.S. dollar has continued to lose purchasing power. More and more printing of dollars has fueled inflation and produced a long-term secular decline in the dollar’s value, although it is still the world’s reserve currency.
Many analysts and economists, especially those of a conservative persuasion, have been calling for an end to the fiat dollar in recent years. They have proposed that the paper dollar be replaced with one backed by American gold reserves.
In recent years some people have questioned whether the gold that is supposed to be held at Fort Knox is actually there, and whether gold owned by other countries is also stored there.
I have read that some foreign gold, including from Germany, has been stored in Federal Reserve banks, but it is not clear whether there is any foreign gold at Fort Knox.
In my view U.S. gold reserves are more than likely safely stored where they should be, but conspiracy theories are fueled by the fact that independent observers are hardly ever given access to Fort Knox. Many years ago CBS’ “60 Minutes” did a segment in which the reporter was allowed to view the gold in Fort Knox.
Periodic proposals for a new gold standard have ultimately gone nowhere.
But the substantial increase in the money supply since the 2008 financial crisis coupled with the continuing decline in the dollar, the increase in the Federal debt, and the significant rise in gold prices, have helped fuel renewed calls for a new gold standard.
It has been estimated that a new gold standard would require that each ounce of gold be valued at $10,000.
This figure, which was reported by Bloomberg on September 15, is the “fair value” for gold if each dollar were backed by an ounce of gold from American gold reserves. According to the most recent data, America’s gold reserves are only enough to cover 18% of the current monetary base at today’s gold prices.
There have been a number of interesting developments recently that involve the use of physical gold as a form of currency.
First, several states have either passed or at least introduced laws to make gold legal tender.
Utah has passed such a bill, while Idaho, Minnesota, North Carolina, and South Carolina have introduced such bills. Georgia introduced but dot not pass a bill requiring that payments to the state be made only with U.S.-minted precious metal coins.
Second, there have been proposals to end the federal capital gains tax on precious metals profits. Currently they are taxed at the rate of 28%, the same rate that collectible coins are taxed at, as opposed to the 15% rate paid on stock profits.
Rep. Ron Paul, who is the Chairman of the Domestic Monetary Policy Subcommittee of the House Financial Services Committee and a Republican candidate for president, recently held a legislative hearing regarding H.R. 1098, the “Free Competition in Currency Act.”
He is a long-time proponent of once again backing our currency with gold and silver to make our currency sound money.
Rep. Paul noted that “This bill eliminates three of the major obstacles to the circulation of sound money: federal legal tender laws that force acceptance of Federal Reserve Notes; “counterfeiting” laws that serve no purpose other than to ban the creation of private commodity currencies; and tax laws that penalize the use of gold and silver coins as money.”
During the hearing, Dr. Lawrence Parks of the Foundation for Monetary Education said that until the 1971 end of the gold standard, the U.S. price level (in other words, inflation) was stable. He also explained that in his view a gold-backed dollar would make collapse of the U.S. and global financial systems impossible.
Third, one of the largest precious metals dealers in the world, the American Precious Metals Exchange (APMEX), recently made a down payment on a 10-year lease of a New York building owned by real estate mogul and former Presidential candidate Donald Trump with gold bullion instead of cash. The gold was three .9999 fine bars totaling 96.45 ounces.
The building where APMEX is leasing an entire floor to expand its operations is located at 40 Wall Street, which is known as the “crown jewel” of lower Manhattan.
There are certain obstacles to the implementation of a new U.S. gold standard.
One major challenge is that according to most experts there is not enough physical gold to create a workable monetary system based on gold.
Lord Robert Skidelsky, a famous British economic historian, has argued that moving to a new gold standard would be highly deflationary to the point that it would cause a worldwide depression.
Deficit spending and money printing are certainly problematic for the long-term financial health of the U.S., but in certain circumstances, such as the current economic crisis, it may serve a useful temporary role.
Under this perspective, when the monetary base shrinks and lending dries up, the government pursues an expansionary monetary policy to increase liquidity and lowers interest rates to encourage borrowing.
Of course, the downside is that if used too much, as many people believe is the case now, such a policy also wipes out the savings and purchasing power of dollar holders.
Some analysts point out that even under a new gold standard, the size of the monetary base would still ebb and flow depending on the price per ounce at which the dollar is pegged, which could be changed over time. That would still amount to a form of devaluation or revaluation of the dollar.
I do not know whether a gold-based dollar would work in today’s world, but I am sure there will be increasing calls for it if the economic situation continues to deteriorate.
In addition, there are some interesting ideas for using our gold reserves to reduce our debts.
One that caught my attention is a proposal from Numismatic News editor David Harper, who has argued in favor reducing the Federal debt by issuing 20-year gold bonds.
Investors in these bonds would be paid a one-ounce American gold eagle each year as a dividend payment on a $360,000 gold bond. This would allow the Federal government to raise $4.68 trillion over 20 years based on gold at $1800.
Contacted for this article, Mr. Harper added that “A new gold standard in the United States would restore confidence in the dollar and the economy only if arrangements for the transition would be considered doable by the financial markets. It took the United States 35 years to move from the financial mess created by the Civil War to formally adopting the gold standard in 1900.”
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for Coin Week, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.