return to the gold standard

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Election 2012: Why the GOP Is Really Talking About the Gold Standard

One of the most surprising proposals from the Republican National Convention was that the GOP platform for Election 2012 includes a commission analyzing a return to the gold standard.

Ever since the United States went off the gold standard in 1971 the U.S. monetary base has grown to its current level of roughly $2.56 trillion. With this increase has come an even more alarming rise in the federal deficit. Currently the U.S. has around $222 trillion in unfunded liabilities.

That's why many, most notably Rep. Ron Paul, R-TX, have called for a return to the gold standard and a compete audit of the Federal Reserve.

But as opponents are quick to point out, it is impractical, impossible, and highly unlikely that America's enormous monetary supply would be backed by gold.

Some on the left, such as Paul Krugman of The New York Times, called the return to the gold standard "an almost comically (and cosmically) bad idea."

So why would the GOP bring it up?

Experts have theorized that the inclusion of a gold standard commission on the GOP party's platform is just a way to encourage Ron Paul supporters to join the Romney camp.

Within the GOP there are worries that these devoted "Paulites" will not vote for Romney unless more of Paul's agenda is taken seriously. The move to "audit the Fed" and a return to the gold standard are two ideas Paul supporters care most about.

But there's more to the gold standard proposal than pleasing Paulites.

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Jim Grant and the GOP Joining Forces to Bring Back the Gold Standard

With two GOP presidential candidates saying they'd add legendary Wall Street pundit Jim Grant to their administrations, bringing back the gold standard clearly has moved up on the Republican agenda.

Ron Paul, for whom returning to the gold standard has been a decades-long crusade, has said he would name Grant chairman of the U.S. Federal Reserve. In his case, that would be a compromise - Paul has often called for the Fed to be abolished altogether.

Meanwhile, Newt Gingrich has promised to appoint Jim Grant to head a commission to study the possibility of going back to the gold standard.

Grant, who publishes Grant's Interest Rate Observer, is a well-known gold bug and critic of the Fed.

His ideas have attracted increasing favor in a party that blames the Fed's easy money policy for the country's economic problems.

Grant calls the current system of fiat currency an "anachronism" and questioned the "command and control, top-down system of having a handful of people at the Fed dictate interest rates."

He's worried that the Fed's quantitative easing policies have created a bubble in Treasury bonds.

And make no mistake: If a Republican president gives him the opportunity, Grant already has a plan, starting with making a public case for the gold standard.

"I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers," Grant told MarketWatch.

Grant said he believes a dollar should be fixed "like a foot, or a pound."

Such a policy would arrest the steep decline in value the dollar has suffered since the United States abandoned the gold standard in 1971 - a point Paul often raises on the campaign trail.

"Since 1971, since we lost our link to gold, the dollar has lost 85%," Paul recently told NPR. "So if you were a saver and wanted to take care of your kid's education, even if you made a little interest, you're going to lose money."

Middle-class worries like that have helped make a return to the gold standard a major issue in the 2012 Republican primary battle.

The other two remaining GOP contenders, Mitt Romney and Rick Santorum, are believed to be against a return to the gold standard, though both refrain from talking about it.

Of course, Republican proponents of the gold standard may not need Paul or Gingrich to win the nomination to move the issue forward.


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Why the U.S. Should Return to the Gold Standard - Even Though it Won't

Should the U.S. return to the gold standard?

It's a question that has taken on new relevance during a time of soaring deficits and sky-high national debt.

Many of the world's most successful governments, from ancient Rome to the British Empire, enjoyed centuries of economic stability by adhering to a gold standard. And some economists credit the period of prosperity at the end of the 19th century to a global gold standard.

"The period of 1870 to 1914 recorded the highest real growth rates worldwide and was

among the most peaceful ones in history," says a report on gold released earlier this month

by European bank Erste Group. "Most of the budgets were balanced, and there was a free flow of capital across borders. The only job of the central banks was to exchange gold for paper or vice versa."

Even former Federal Reserve Chairman Alan Greenspan has noted the historical benefits of the gold standard.

"Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity," Greenspan told Fox Business Network in January. "There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard."

Money Morning Contributing Editor Martin Hutchinson agrees, and he is one of a growing number that believe the U.S. should return to the gold standard - even though he sees such a drastic change as unlikely.

"It would solve the unemployment problem, because expensive capital makes people use more labor," said Hutchinson. "And it would indeed enforce fiscal discipline."



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