What could happen if US went back to gold standard?

Question

Ron Paul has promised that, if elected, he would abolish the Federal Reserve, return to the gold standard, abolish the IRS (and replace it with nothing), and radically reduce the size of the federal government.

What is the worst thing that could happen if this happened? What would likely happen short and long term?

Answer 1

Probably tremendous deflation.

Look, on many issues, Ron Paul really has his head up his butt, and the "gold standard" is one of those issues.

When we were on the gold standard, we still had inflation, recession, depression, bank panics, the whole gambit. The Gold Standard didn't help.

And where's all this gold supposed to come from? We sure as hell don't have enough to cover the currency we've issued. Not nearly. so what do we do. Devalue the currency? Oh, swell.

This "gold standard" is another one of those populists myths that Paul likes to feed to the hungry and desperate, but really it's just a myth-- a symbol if you like. America's wealth will flow or ebb irregardless of what standard we are on.

Ron Paul reminds me of what Lincoln allegedly said about a political opponent: "He was like an old steamboat on the river I once saw. It has a huge smokestack and a small engine. "

Answer 2

Fortuantely, Ron Paul, would be unable to implement those ideas without the participation of congress, as most of the government agencies he seeks to elmininate are defined in law. The president is required to execute the law or risk impeachment. Even if all discretionary spending were eliminated the government budget would be $1.7 trillion or about 61% of the current total, and many Americans would miss the federal services that were eliminated.

Eliminating the IRS is probably not tenable, as the government requires a source of revenue. It could be renamed (like renaming the INS or USCIS).

Ron Paul would probably not be successful in abolishing the Federal Reserve or replacing the current US dollar with one based on a gold standard. The simple problem is that there isn't enough gold to convert US dollars at current market rates, and even if there were, it's not clear how the government might obtain all of the gold to finance the issuance of reserve currency. The government might seize all gold and make the trading of gold by private citizens illegal (an option that would probably offend a libertarian) as it did in 1933. Gold also has industrial uses that would have to be served by some mechanism.

The worst case scenario is he succeeds in the plan and the US$ enters a liquidity crisis. Individuals and companies would have to save money to account for the uncertainty in being able to receive cash. Market interest rates would rise because of the scarcity of money. In combination these would lead to deflation, while the values of outstanding saving would increase, so would the value of outstanding debts.

In the US, much debt is scheduled in floating rates, so consumers would spend more to service their debts. With household debts at 120% of income, this would probably trigger consumer bankruptcies.

The fixed-rate debt would trigger bank bankruptcies (like during the savings and load crisis). There would be a long depression while inflation unwound.

The government would likely default on it's debt, which would destroy the savings of many Americans as well as Asian and Middle Eastern governments. They would become hostile trading partners depriving the US of oil and cheap consumer goods.

In the very long term, everything would sort out and the US would resume it's normal growth, but not before 100 years of economic setback.

Answer 3

Seems like the very first thing to do, by the answers here, is re-educate Americans about the Gold standard.

The Gold standard STOPS inflation, as in higher prices on everything.

The U.S. treasury was specifically set up to manage the American money, Gold/Silver, without charging interest on loans, like the Federal reserve system does today. Of course interest bearing loans would still be used by lenders.

Here is some required reading about the Gold standard:

http://www.fee.org/publications/the-freeman/article.asp?aid=3233

And this is a very long article by Ron Paul on exactly why the USA should return to the Gold standard:

http://www.fame.org/HTM/Paper%20Money%20and%20Tyranny.htm

Please, take the time to read it.

Excerpt:
Paper Money and Tyranny

HON. RON PAUL OF TEXAS

IN THE HOUSE OF REPRESENTATIVES

September 5, 2003

ll great republics throughout history cherished sound money. This meant that the monetary unit was a commodity of honest weight and purity. When money was sound, civilizations were found to be more prosperous and freedom thrived. The less free a society becomes, the greater the likelihood its money is being debased and the economic well-being of its citizens diminished. [end excerpt]

Thank you.
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Answer 4

Whomever the president is at the time would probably be assassinated. JFK was pushing for a return to the gold standard..

Answer 5

We never should have left the gold standard but going backwards now well........ Ever hear of the paso? It takes a couple hundred of them to buy a taco in mexico!!!!

Answer 6

I thought we were on the gold standard. What's up with all that gold at Fort Knox?? Anyway, it all makes no sense if you think about it. Why is gold valuable? Because we place a high value on it. Because it's shiny? Quartz is shiny, and it's basically worthless. Because it's malleable? So is copper. It's weird to think about, basing a whole economy on a substance that is just another chunk of rock, really.

Answer 7

I don't think the banking industry would like it very much. Imagine if all that money they lent suddenly became relatively worthless! lol

Isn't is weird to think that we are borrowing money that really doesn't exist out there?

Answer 8

the devil could reign for a thousand years

Answer 9

The CIA would kill him first!

Answer 10

deflation