Gold Standard

   "I don't give a damn for a greenback dollar, spend it fast as I can." -- American folk song.

   "Bad money drives out good." -- Gresham's Law.

   "Prices rise to absorb the amount of money available. Ask any tourist." -- Pug Mahoney

   A return to the gold standard will force government to balance the federal budget, and that's a good thing.

   So goes the claim. But is it a good thing? By definition, the gold standard limits the amount of money in circulation because it specifies that all money be either made of something of value in itself (gold or silver coins), or that it be backed by an equivalent amount of gold or silver.
   Some of us can remember when the U.S. government issued silver certificates, specifying, "This certifies that there is on deposit in the Treasury of the United States one dollar in silver, payable to the bearer on demand." That was back in the day when one silver dollar coin was made of roughly one ounce of silver, and other coins (half-dollar, quarter and dime) were also made of silver, a metal with intrinsic value.
   The value of gold, moreover, was fixed by international agreement at $35 an ounce. Therefore, government could print only as many paper dollars as could be supported, or backed, by the amount of gold the government had in its possession.
  If government had no gold in its vaults, it could print no paper money. Or if it did print paper money, it would have no value and people would refuse to use it. Hence the fate of the 19th Century "greenback dollar," which was supported, or backed, only by the green ink used to print it.

   The spot price of gold on international metal markets currently is roughly $1,764 an ounce. Silver is trading at about $34 an ounce.
   Therefore, if government printed as many dollars as could be supported by gold on hand, it would print more dollars, and consumer prices would rise by a factor of at least a thousand. Alternatively, if no paper currency were issued, people would use only coins, since they have some value in and of themselves. And with a severe limit on the number of coins in circulation, the result would be economic disaster for the entire nation.
   Gresham's Law has not been repealed. If a person has two pieces of money with equivalent stated value, a silver dollar and a paper dollar bill backed only by the ink used to print it, what will happen? That person will spend the bill and hoard the silver. In today's market, that coin could be taken to a coin dealer and exchanged for many times its face value.
   In short, no modern economy can survive with such a system. A return to the gold standard would limit not only government activity, but also the economy as a whole.