First, a brief history lesson. America started out on the silver standard. Then, we went bimetallic (gold and silver) in the 1800's. In 1900, under President McKinley, we ditched silver and went pure gold. Then, in 1913, something called the
Here's how it works: when the Fed cuts interest rates, the Treasury generally must print more money (increasing the money supply), when they raise rates, less gets printed, and banks get less. If the amount printed is less than the amount of worn-out money that is burned, the money supply decreases. Paper money enters the economy when the Fed lends it at interest to the Treasury, who prints it.
Now the Fed caused to be printed a ton of money from 1913 through the late 1920s. We were on the gold standard, but they printed more paper money than there was gold with which to back it, causing inflation. Up until this point, we had very low inflation, and even a deflationary bias. Gold had anchored the money supply, and was supposed to limit the amount of money printed, but the Fed disregarded this fundamental rule, and thus we had a fractional reserve gold standard instead.
In 1928, the Fed began raising rates after cutting them for a long time, ostensibly to discourage excessive speculation in the stock market. The market was in the midst of a bubble, and in 1929 they decided to pop it. Ouch. Though the recession began three months prior to the crash, this undoubtedly worsened it. Banks began failing. Instead of cutting rates, the Fed still kept raising rates to prop up the overvalued dollar. But the dollar still dropped, and the price of gold on the black market skyrocketed as people made a run on the dollar. In other words, the Fed had turned a mild recession into a full-blown depression, the worst we ever had. They essentially fought fire with gasoline! In 1933, FDR decided to confiscate everyone's gold with the Gold Act, and shortly thereafter he abolished the gold standard, giving the Fed unlimited money printing power. Finally, rates were cut since there was no reason to prop up the dollar anymore, and the economy slowly improved. Though that may sound superficially like an argument against the gold standard, it is really an argument against fractional reserve banking and the Fed. And the story is not over yet.
After World War II, an international quasi-gold standard called the Bretton-Woods system was created in 1946. Though it worked well at first, the Fed couldn't seem to keep its hands off the printing press. We paid for the Cold War, the Korean War, and the Vietnam War all with overvalued dollars that were supposedly backed by gold. By 1971, this system had failed miserably, stagflation began, and Nixon abolished the gold standard entirely. Inflation soared to levels never seen before, and a deep inflationary recession occurred in 1974-75. Stagflation (a double whammy of high inflation and high unemployment) was a new phenomenon that had previously been impossible due to the gold standard, but now it was everywhere. It got so bad that in 1982, the Fed engineered a second recession by jacking up the interest rates to over 20% to choke off the bloated money supply and thus kill "excess" inflation, and it worked (but was very painful nonetheless). But the inflationary bias of fiat money still remains to this day, excess money is still printed, and thus a dollar now is worth less than what a NICKEL was 100 years ago.
Currently, the U.S. Treasury owns about 238.5 billion dollars worth of actual gold as of April 30, 2009. Even if we assume a value of $1000 per ounce, that is $260 billion, that's about 7% of next year's government budget. And our incomprehensibly large national debt is slightly larger than the approximate value of all the gold in the world. In other words, we got way too many dollars in circulation, and not enough gold (or even silver) to back all of them as it stands now. You can thank the Feral Reserve for that.
Where do we go from here? Here are the alternatives: 1) redefine the current dollar in terms of gold based on the current market price, fractional-reserve, and trust the Fed not to print too much money, 2) do the same as #1, but abolish the Fed and leave control of the money supply to Congress and interest rates to the market, 3) create a new, full-reserve, gold-backed currency in parallel with the current dollar, and abolish the Fed, 4) do #3 but phase out the old fiat dollar entirely, or 5) continue business as usual, and let the dollar depreciate even more.
Alternative #1--been there, done it, caused the Great Depression. Very bad idea.
Alternative #2 would be like a sequel to Bretton-Woods, minus the Fed of course. That would not be a pure gold standard since it would be fractional reserve, but we would keep the same currency (which would be fixed at today's value more or less with minimal depreciation). It would be a definition of the dollar, and a limit to how much can be printed. In other words, stability. A viable idea.
Alternative #3 is similar to the aforementioned rumor (minus the Fed). Several unrecognized private currencies like this already exist (Liberty Dollar comes to mind). But the long-term effects of having two officially-recognized, interconvertible currencies simultaneously is unknown.
Alternative #4 is ideal, a full-reserve gold standard, but we would have to proceed with caution to avoid too much disruption to the economy. In the long run, this would be the best bet.
Alternative #5 is obviously bad in the long run.
The TSAP recommends that we start immediately with alternative #2, and gradually transition to #3 and/or #4 to phase in a full-reserve currency. Though less than ideal, many of the benefits can be achieved using alternative #2, provided that there is no Fed and that gold and dollars are readily interconvertible at any bank in real time. And also that the currency is not debased any further. Most people would rather not carry around physical gold anyway, so the stock of gold is unlikely to be depleted.
The transition would occur as follows if the TSAP was in power:
- Pass the Federal Reserve Abolition Act, restoring its power to Congress and transfering its assets to the U.S. Treasury.
- Enact a law that defines the dollar as 1/1000th of an ounce of gold, based on a value close to the current market price of gold (near $1000/ounce). Define silver initially at $20/ounce.
- Produce more gold and silver American Eagles and Buffalos labeled as $1000 and $20, respectively, with full convertibility between paper money and such coins (obviously a very limited number made). They will be legal tender for all debts. Freeze the number of paper notes in circulation.
- Produce a limited number of gold certificates, and only those will have full convertibility with gold bullion (other than the limited number of Eagles and Buffalos) at banks. These will, in effect, be a second currency. An absolutely full-reserve currency.
- Gradually phase out the old fractional-reserve dollar.
- Pass a Balanced Budget Amendment to the Constitution, and run surpluses until the national debt is paid off.