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Questions from Texans - Do you support returning to a Gold Standard?

Well there are many people who are not going to like my answer, but I am going to be straightforward and honest with you. I like many of you use to feel that returning to a Gold Standard is the magic bullet solution. I felt that way for a long time, and didn’t understand why Government wasn’t listening. It wasn’t until I was getting my Doctorate in Business Administration that I found out what it truly meant to be on a Gold Standard for Currency. As Comptroller it is my job to safeguard and protect the Texas Economy and foster its growth and
development. So let me first give some history for those who may not be as familiar with the idea as others. The U.S. went off the gold standard under President Nixon in 1971. What may not be widely known is that the classic gold standard that the U.S. was utilizing (and that Britain and France had followed before) included a 40 percent cover ratio. What does that mean? The government will only print money if it has gold in its Treasury equivalent to 40% of the currency in circulation. That means if you have $10 billion of money in circulation, you have to have $4 billion of gold in the Treasury. Given that the current U.S. federal debt stands at $17.5 trillion, it begs the question, how much gold does the United States own? Currently, the U.S. does have the largest gold reserves in the world at 8,133.5 tons, according to the World Gold Council. Just for comparison, Germany is a distant second with 3,395.5 tons and the IMF (International Monetary Fund) is in third place at 2,814 tons. So, the U.S. has a lot of gold, but is it enough to back all our debt? Not even close. Even if we liquidated our gold we could only bring our debt down to approximately $15.5 trillion.

What are the positives of a gold standard for the economy, and what are the negatives?

Pros: Simply put, the biggest positive of a return to the gold standard is it would give us fiscal discipline for governments, businesses and individuals. It would force all of us to be more fiscally responsible.

While that may sound enticing given the $17 trillion price tag Washington D.C. has currently placed on our future, the gold standard comes with some costs too.

Cons: On the negative side of the coin, our jobs, incomes and the overall economy would grow at a much slower pace. Why? The answer comes down to money supply. That simply means the total money in circulation. Modern finance has growing money. Money supply grows in reaction to the growth of the real economy. As an economy grows, more wealth is generated. Postindustrial growth for the last 160 years has averaged 2-3 percent and the gold supply hasn’t
risen at the same pace.

To put another way, today’s global economy stands at roughly $100 trillion GDP, and has been growing at 3-4 percent per year. Finding that much more gold per year is just not going to happen. That’s why going back to the gold standard would be more than difficult.

Bottom line? A gold standard would result in a relatively fixed money supply. Money supply couldn’t grow faster than the supply in gold, which would ultimately choke off growth. It would
force lending to slow down and the economy to slow down. Explaining the connection and impact on lending. For every dollar a bank has, it can loan maybe $10-15 out. But, if those dollars are convertible to gold, that all collapses.

If you can’t borrow, it would choke off the job growth, businesses can’t raise capital, and poor and middle class consumers can’t buy higher cost financed items like cars, houses, and luxury items because they can’t borrow. Basically, you put a chokehold on the economy.

Additionally, for anyone who has current debt now, including a mortgage, our ability to pay it back would take us longer and would cause us to do without other things to pay it back. The gold standard would result in a devaluing of the dollar and it would buy less. That would include bonds issued by cities and towns, and corporate debt as well as consumer debt. The lenders would benefit, but the people who suffer are people who have to pay back debt.

If we are going to manage our money supply, the economy cannot grow as rapidly as it wants to grow. There will be periods of deflation, starvation and depravation that simply don’t have to occur. We do not want to repeat periods of starvation were seen in the U.S. through the 1870′s-1890′s because the money supply could not grow fast enough to grow the economy.

Another stumbling block would be the difficulty in actually organizing a shift back to the gold standard. Many top Economists say it would only work if all countries agreed to work off the gold standard. Suppose we did it and the rest of the world didn’t, we’ve got an economy moving at a snail’s pace and we’ve got the rest of the world growing at a rate of 3.5-4%.

In conclusion I believe the odds are remarkably high that we will see gold play an increasing role in the monetary system over the next ten years, but, I don’t think we will ever see a return to a pure gold standard.

 


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