By Louis Golino for CoinWeek .....
Republicans, or at least many of their political leaders, just can’t seem to get enough of the gold standard.
Marsha Blackburn, a GOP representative from Tennessee, told the Financial Times recently that Republicans agree on the idea, and that the House recently passed a bill on it. She believes it “is something we think needs to get done.”
The idea of tying the dollar to gold appeals to conservatives who are concerned about the possibility of future hyperinflation, and those who don’t believe in fiat-based paper currency.
Throughout the 2012 GOP primary process, one candidate after another endorsed the idea, as I discussed in detail earlier this year (http://www.coinweek.com/
Newt Gingrich told Mother Jones recently he favors the appointment of gold standard backers on the new commission after the reports surfaced about the platform.
GOP presidential nominee Mitt Romney’s views on the gold standard are unclear. He said in an interview earlier in the year that he does not see it as a “magic bullet substitute for economic restraint,” but that is about all he has said about it. He has called for replacing Ben Bernanke as Federal Reserve chairman.
Vice Presidential nominee Paul Ryan has also not endorsed the idea but supports something similar, specifically, pegging the dollar to a broad basket of commodities, an approach many economists question.
The new commission would be similar to the one authorized by legislation passed by Congress in October 1980. That commission ultimately rejected the idea of returning to the gold standard, but it also made some recommendations calling for the creation of an American gold bullion coin program, which laid the groundwork for the American Gold Eagle program that started in 1986.
The 1980 commission began work after Ronald Reagan became president in January 1981. The commission was dominated by gold standard critics, and a minority report that endorsed a new gold standard was prepared by Ron Paul and Lewis Lehrman, who have both favored the idea for decades.
At the time, the only gold coins or medals the U.S. Mint was issuing were the American Arts gold medals. And South African gold Krugerrands, which were not legal to buy in the U.S. because of Apartheid, were dominating the global gold bullion coin market.
The Tampa platform said the 1981 commission explored the possibility of a “metallic basis” for the dollar to tame the high inflation of the late 1970s, which is an odd way to phrase it since anyone familiar with the issue knew the reference meant one specific metal of the precious variety, namely, gold. Perhaps they were thinking of silver too.
The platform provision refers to the double-digit inflation of the Carter era and the 1981 gold commission, and then says: “Now, three decades later, as we face the task of cleaning up the wreckage of the current administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar.”
But in reality when the U.S. was on the gold standard, which was from 1900 until August 1971, the supposedly fixed value of the dollar was changed numerous times. The main way that was done was by altering the amount of silver and gold used in our nation’s coinage. In addition, the fixed amount at which the U.S. government valued an ounce of gold, which is still the basis for valuing the gold at Fort Knox, was changed several times.
The news coverage of the GOP platform’s gold commission idea has focused mainly on the perceived unworkability of tying the dollar to gold. In the aftermath of the platform news, a barrage of anti-gold standard commentary was published throughout the media.
There are three main arguments. First, there is said not to be enough gold in the world for it to serve as the basis of a new U.S. monetary system.
Second, the American government would supposedly relinquish control of monetary policy to the vagaries of the gold market and gold mining companies.
And third, those who oppose a new gold standard argue that there is a very real risk of monetary instability and even collapse of the financial system if the dollar were linked to gold. And that is the mirror image of the main argument of gold standard proponents, which is that it would create sound money and a more stable financial system and stave off an economic collapse.
The main point of critics is that a new gold standard would deprive political leaders of the flexibility they need to set interest rates, adjust the money supply, and generally manage the economy.
To understand these issues better, it is important to remember that gold is the only commodity whose price has little to do with supply factors.
Normally, the price of a commodity is driven mainly by supply and demand, but gold is different. Its supply is essentially what economists call inelastic.
Unlike silver, where supply is very much an issue because silver is used up in many different applications, almost all the gold ever mined in the world still exists. Gold also has some industrial and medical applications, but the gold mined each year, though relatively limited, is enough to replenish what is used up. All the rest lies in storage, or is used in coins and jewelry. And very little new gold is being mined because there are not many large deposits left, and the cost of mining has gotten very high.
There is even talk of mining gold in outer space from asteroids though it is hard to see how that would be cost effective.
So gold’s price is definitely demand driven, especially by demand in India and China, and other factors like monetary issues, especially central bank gold purchases, and central bank monetary stimulus programs, plus international instability and the state of the economy, are the key determinants of its price.
My own view, as I explained in August (http://www.coinweek.com/
Finally, noted gold expert and investor Peter Schiff, CEO of Euro-Pacific Capital, told King World News (http://kingworldnews.com/
Schiff later that day contacted King World News to clarify his remarks. He said it could actually take longer than he said earlier, adding: “I think we could have a currency crisis or a sovereign debt crisis begin within the next two years. That might precipitate going back on a gold standard, but who knows? It could be four years, five years, I don’t know.” In Schiff’s view, the sooner the U.S. returns to gold, the better, but before long it will be forced to take that step.
On the GOP platform issue, Schiff said: “Well, discussing and doing are two different things. But eventually we will be back on a gold standard, not because politicians want it, but because the public demands it and the situation requires it.”
He may or may not turn out to be right, but it is worth noting that he and many others with similar views have been predicting a collapse of the financial system on a regular basis for years, and it has not happened yet.
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 CoinWeek, “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.
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