What would happen if the U.S. went back to the gold standard?

The GOP promises to establish a "gold commission" to examine whether the dollar should be linked to gold — even though the idea has long been discredited

Gold bricks: Many economists argue that a gold standard would severely curtail the emergency powers of the Federal Reserve.
(Image credit: Thinkstock/Jupiterimages)

"The gold standard has returned to mainstream U.S. politics for the first time in 30 years," say Robin Harding and Anna Fifeld at The Financial Times. The GOP is preparing to include a "gold commission" in its party platform that will investigate whether the value of the dollar should be linked to gold, a policy whose last vestiges were finally abandoned by President Richard Nixon in 1971. The last time that the Republican Party seriously revisited the gold standard was in 1981, when Ronald Reagan launched a similar commission that concluded a return to the gold standard was probably a bad idea. So why has the GOP returned to gold in the age of Mitt Romney? Here, a guide to the debate and the conservative infatuation with the yellow metal:

How does the gold standard work again?

Under a gold standard, the value of the greenback would be inextricably linked to the value of gold. Supporters of the monetary system claim that the gold standard is the only way to keep the country from borrowing too much money and racking up deficits. "Think of it as a person with a debit card rather than a credit card," Mark Luschini, an investment strategist, tells Reuters. "The debit card holder can only spend what he or she has in the bank." In addition, supporters say a gold standard would stabilize the dollar and prevent inflation.

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Why has it made a comeback?

The conservative craze for the gold standard, championed by libertarian Rep. Ron Paul (R-Texas), has picked up in response to the loose monetary policies of the Federal Reserve, which effectively printed new money to combat the financial crisis and recession. A gold standard would severely curtail the emergency powers of the Fed, since "it could provide additional credit only if it somehow came into possession of additional gold," says Barry Eichengreen at The National Interest.

What authority would the gold commission have?

The commission "would have no power except to make recommendations," and its main purpose would be to "educate politicians and the public about the merits of a return to gold," say Harding and Fifeld. Analysts warn that its inclusion on the party platform does not necessarily reflect the mainstream GOP position. However, Rep. Marsha Blackburn (R-Tenn.), co-chair of the Republican platform committee, insists otherwise, saying the entire platform was "adopted because they are things that Republicans agree on."

Is it a good idea?

No. "Economics is often a contentious subject, but economists agree about the gold standard — it is a barbarous relic that belongs in the dustbin of history," says Matthew O'Brien at The Atlantic. "The problems with the gold standard are legion," says Ezra Klein at The Washington Post, "but the most obvious is that our currency fluctuates with the global price of gold as opposed to the needs of our economy." Think about it this way, says Noam Scheiber at The New Republic: "If there's suddenly too little gold — suppose something crazy happens, like South African miners go on strike — then there will be too few dollars relative to the amount of buying and selling going on in the economy." Then people start to hoard their dollars, spending slows, "and the economy collapses." The recent financial crisis shows the importance of giving the Fed flexibility to open the money spigots if necessary.

How does Mitt Romney feel about it?

Romney is probably too smart to support a return to the gold standard, and "commissions are a great way to kill bad ideas," says Matthew Yglesias at Slate. His running mate, Paul Ryan (R-Wis.), however, favors backing the dollar with a "basket of commodities," which could be even worse. "It means that if a drought devastates the corn crop or a war disrupts Persian Gulf oil supplies, we automatically respond with tight money and a demand-induced recession," says Yglesias. "Alternatively, if someone discovers a cheap pollution-free method of generating unlimited electricity we'd end up with a ton of inflation."

Sources: The Atlantic (2), The Financial Times, The National Interest, The New Republic, Reuters, Slate

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