Umlaut wrote:The current proposed plan by the Ronpaul isn't an adoption of a gold standard. It is to authorize the federal reserve to print notes backed by gold. This issue has been covered pretty thoroughly in the thread already.
I'm going to jump in here and give a reason why this is a bad idea.
Even with a gold backed currency, the value of it is still affected by economic pressures, in particular, the interest rate. You see, you can't simply just tie the value directly to gold, because banks can lend money, and when banks lend money, the money supply grows until that money is paid back. So the same amount of gold backs a larger money supply, which is essentially results in a dollar with lower value. At the same time, you can't prevent the banks from lending outright because if you do, the economy crashes because businesses can't make any capital investment.
All a gold backing does is provide a flat rate that you can exchange your currency for to gold directly from the government. All this does is provide a minimum value, and if that minimum value is reached, then currency holders exchange their currency for gold . It is also an unstable solution, since the exchange to gold devalues the currency more by reducing faith in it, which results in further exchange to gold, ending with the currency failing.
Eventually, a gold backed currency will fail, and it will happen when the backing of the currency exceeds the real value of the currency. To prevent this, the gold reserve backing the currency must grow at the same rate the as the currency does, which will at some point fail. And to do this, the government will have to obtain the gold to do this, which will cost money. Essentially, alone, a gold standard will fail given time, and beside a fiat system, it will cost a large amount of money to maintain.
Another reason is the same reason that FDR made the exchange of dollars for gold illegal. When depressions/recessions occur, two particular things happen. Bank runs start on affected banks, which causes banks to fail. Coinciding with this, if there is a gold backed currency, currency holders will exchange their dollars for gold, since in the short run, gold is much more stable than currency. As more currency is exchanged, faith in the currency in question drops and more bank runs occur as people become desperate to exchange their dollars for gold.
Now something that would be okay is to print bonds that are backed by gold, but do not make them legal tender. That is already done though in the open market.