I’ve gotten a couple of questions from a couple of different readers regarding how feasible it would be to return to a gold standard. The argument goes something like, “If our national debt $9.6 Trillion dollars, and gold is $900 an ounce, how on Earth could we return to a gold standard since we don’t have nearly enough gold ounces.”
This question confuses the current market value of gold with what a gold standard is. A gold standard is merely a commitment that a currency is now redeemable at a set quantity of gold and does not have to in any way mirror the current market value of gold. The US government could return to a gold standard today if they wanted to by committing to redeem all US dollars into gold at the ratio of $1,000,000 per ounce. Under this standard, the US would now need $9.6 Million ounces or roughly 300 tons, which is easily done. Now a lot of you might be thinking, “But that’s way too high a value of gold,” but you’re again confusing the current market value of gold with a government’s commitment to support it. Setting a high value like $1M an ounce means the government has set a very low bar for itself in terms of gold redeem-ability; somewhat like an out of shape person deciding they can only manage five sit-ups a day to begin.
Once the exchange rate would be set, the marketplace would adjust to reflect this new reality and probably soon reflect the new exchange rate. That means that, from that point forward, gold really would be $1M an ounce! “But that’s preposterous!” you want to blurt out, but be patient. You see, the entire exchange rate of goods and service would soon reflect this new information, and we’d pretty quickly start to see other prices rising to meet gold’s new price. That would mean you’d probably see oil selling for $100,000 a barrel, and the average rate of labor becoming somewhere around $10,000 an hour. Yes, the adjustment period would no doubt be a bit hairy, but once it was all done, the US would be on a gold standard once again. (Incidentally, if you’d like a more elaborate and gradual plan to implement the gold standard, I’d recommend you check out G. Edward Griffin’s The Creature from Jekyll Island.)
Now once this gold standard was in place and the market place had had time to adjust to the new reality, the government would have to start making some harder choices. If it wanted to implement a new entitlement program or conduct another war, it would have to ask itself “Where are we going to get the gold to do this?” And if it couldn’t? Well, no gold means no program. No war.
You see, the reason for the confusion at the beginning is that the government has just been conducting whatever programs and wars it wanted to over the last few decades. They have had to face the same question of “Where are we going to get the money to pay for all of this?” but they have been able to answer with, “We’ll just print it.” That’s why the gold standard was eventually abandoned and why our liabilities are so far in excess of our ability to pay that the mere thought of entertaining a gold standard causes the mind to boggle at the discrepancies.
That gold is trading at such a low level in comparison to this nation’s liabilities is no accident. The US Treasury and the Federal Reserve have been working very closely to have the US Dollar maintain its value despite the fact that it continues to be printed at will. In essence, this exercise has allowed us to peek behind the curtain and see that the “Great and Powerful Dollar” is really a construct that is carefully maintained by a few people in the know. This is also why I’ve chosen to entitle my book, “What Do You Mean My Money’s Worthless?” There is simply no way this nation can afford to repay its liabilities and the value of the dollar is going to be the ultimate casualty.