Largely as a result of Ron Paul’s remarkable organizational abilities during the long Republican primary, the party platform will, for the first time in twenty years, advocate a return to the gold standard.  This strongly appeals to those who believe it will automatically limit spending.  As usual, it is more complicated.

America was on the gold standard until President Nixon took us off of it in 1971 during the first oil crisis.  At that time, an ounce of gold was slightly over $20 each.  Today, our money supply is roughly $2.56 TRILLION, and it is backed by only 262 million ounces of gold.  That means gold would soar to $10,000 per ounce, which would be one gigantic economic adjustment.  If you believe the Republican Party will actually do this, you should consider buying gold now.

To keep the arithmetic simple, let’s assume the current market value of gold is $2,000 per ounce.  That means our money supply might be 400% too large for the amount of gold backing the dollar.  Shrinking our money supply that much and doing it suddenly will certainly cause another depression.

Returning to the gold standard would be an admission that elected politicians are incapable of making the hard decisions, and I would agree with that.

Another approach would be a balanced budget amendment to the Constitution, which is also an admission that elected politicians are incapable of making hard decisions, and I would agree with that again.

However, one of the main reasons that Nixon killed the gold standard over forty years ago was because his policy options were limited by it.  He was under political pressure to “do something” about the high levl of unemployment and wanted to engage in deficit spending.  (This is a Keynesian fiscal approach.)  He needed freedom to act, and the unemployed appreciated his actions.  Unfortunately, he made a long-term change to our financial system to fix a short-term problem.

A better approach would be the Austrian or “tough love” solution of requiring the budget to be balanced but, instead of being balanced every single year, over every four-year rolling period.  If you have a big deficit this year, it is fine to take a Keynesian approach and have deficit spending, but then you must produce enough surplus over the next three years to pay off the deficit.

Yes, there would be problems with implementing this solution, but it would still be far better than our current reliance on the elected children in Congress to make the hard decisions for us.