This may have been repeatedly done over and over.
Trust that I'm not a troll. And would like to see Dr Paul become the next president.
But how in the fuck would going back to the gold standard in a globalized economy be a good thing?
devslashnull,
That's a good question. I know it's heresy to say this on this forum, but the simple answer to your question is it would
not be a good thing to go back to the gold standard.
The idea that a gold standard will always prevent inflation is simply not true. It might prevent inflation, it might not. You have to understand what inflation is to understand why this is true. In simple terms, inflation is what happens when the money supply increases more quickly than the goods and services available for sale in the economy. When more dollars chase the same amount of goods and services, prices will rise. So the question you have to ask is, who is to say that the money supply would be limited simply because we're using gold? If more gold is discovered, the amount of gold increases and there will be inflation unless the output of goods and services increases to match the new gold supply. It's wrong to think that the main purpose of gold is "backing up" paper currency. As many people have already said, the main purpose of a gold standard is to limit the amount of currency that can be put in circulation at any given time. This keeps government honest.
The gold standard created some serious problems in the late 19th century when the economic output of the U.S. was increasing rapidly but the money supply couldn't keep up. There was a period of deflation and prices actually went down significantly. This might seem great to a lot of people today, but it was devastating to the economy. Businesses that had taken out loans earlier still had to pay those loans off at the same dollar amounts, but deflation meant that they were paying them off with dollars that were worth more in real purchasing power than when the loans were taken out. This essentially raised the price of the loans, so their expenses increased. At the same time, the price of the goods and services provided by businesses had declined so their net revenue could no longer cover their expenses. Companies cut their work force or went out of business, and those workers who lost their jobs still had to pay their mortgage, but they couldn't. In short, debtors defaulted on loans and mortgages, banks went under because of this, all very nasty nasty stuff. Deflation can be a very bad thing!
In
theory, the Fed can regulate the money supply so it increases or decreases as needed, to keep inflation or deflation to a minimum. Of course, as we all know, in
practice the Fed uses their power to increase the money supply more than it should, causing steady inflation. They claim they're keeping "inflation under control" when they're really the ones causing it, and it's all very calculated because it's much easier politically for government to "print" the money rather than raise taxes. The overall value of the dollar goes down when they do this, but since they now have more dollars even though they're worth a little less, they have transferred wealth from the citizens to the government. This is because even though every dollar in circulation has declined in real purchasing power, the government now has more dollars but the citizens don't. So the government has more purchasing power and the citizens have less purchasing power. This is the "inflation tax" that Ron Paul talks about.
The other problem with the Fed is that they don't have a crystal ball, and they don't always know the best way to increase or decrease the money supply. A prime example is that during the Great Depression, in 1931, the Fed actually raised interest rates! Most people know that the way to mitigate the effects of a recession, at least in the relatively short term, is to reduce interest rates (just like the Fed is doing now). The danger is, of course, inflation. But the main point is that the people in charge of the Fed are not infallible; sometimes they were inept like during the Depression. Now they're simply corrupt. Either way, they don't always do the right thing.
I personally believe that the powers held by the Fed are very important, so long as they are used responsibly to keep inflation and deflation in check. But the problem is that they are not currently being responsible, because they don't have to be! They have simply outlawed all other currencies, so they have no competition. They're the only game in town, so they can do whatever they want. Since only a relatively small segment of the population knows what the Fed actually does, there isn't any noticeable political backlash. The only check on their power is the market -- if the Fed were acting grossly irresponsibly, the market would freak and economic chaos would ensue -- but since so many big businesses are in bed with the government, they actually benefit from some of the Fed's inflationary policies (think about all of the defense firms that lobby for us to get involved in military conflicts, which almost always require inflationary "printing" and spending). This is fascism - government in bed with big business. But back to the main issue...
The way to encourage the Fed to be more responsible is to allow competing currencies. Then people could easily transfer their wealth from dollars to a competing currency if they believed the Fed policies were working against them. You can argue that foreign currencies are a form of competing currency, and in theory I suppose that's correct, but you don't see many businesses in the U.S. that accept Euros. The Liberty Dollar was a competing domestic currency, but the Liberty Dollar operation was recently shut down by the government (
http://www.libertydollar.org/).
To summarize, the gold standard is simply a way of placing a limit on the power of government to tax the population through the hidden "inflation tax." It prevents government officials from printing up money whenever they want to fund a new, sexy government program so they can get re-elected ("Look Ma, a great new program without a tax raise!"). In the end, neither the gold standard nor competing currencies will fix everything, but at least competing currencies can encourage the Fed to be a little more honest with their monetary policy. In my opinion, it would be a terrible mistake to rely exclusively on either the gold standard or the Federal reserve system; both have proven to be unreliable in terms of controlling inflation and deflation. The best answer is a mixture of competing currencies ("backed" by gold and silver, or some other commodity) and the Fed system, but definitely with more transparency, maybe even put it directly in the hands of elected officials. Of course, since Ron Paul is totally awesome and fantastic, he recognizes this. Hence, he advocates for the legalization of competing currencies.
