All that Glitters: Considering Ron Paul’s Ideas On Money And The Gold Standard


During this week’s congressional hearing with Federal Reserve Chairman Ben Bernanke, Texas Congressman and presidential candidate Ron Paul raised the idea of ending our country’s dubious experiment with fiat money and reestablishing a sound, tangible basis for the dollar with a gold or silver standard. Given all that has happened to the dollar in the four decades since it was last tied to anything real, this is an idea worth considering.

Throughout most of our nation’s history, the value of US currency was tied to a specific quantity of gold or silver. The last vestige of the gold standard emerged from the post-war Bretton Woods Agreements in 1946. Under this gold exchange standard, the US pegged the value of gold at $35 an ounce, and all other countries that pegged their currency to the US dollar were, in effect, on the gold standard. This arrangement lasted until August 15, 1971, when President Nixon severed the link between the US dollar and gold.

While scandals involving presidents grab headlines and end up as milestones in the history books, it’s the executive orders and legislative accomplishments that, for better or worse, have a lasting effect. Watergate was sensationally stupid and it cost Nixon the presidency, but his decision to end the direct convertibility of the dollar to gold did far more damage to the country because it gave the government a power not found in the Constitution: the power to create money out of thin air.

To understand the problem with the government taking this power unto itself, you first have to understand money. Francisco d’Anconia’s famous money speech in Ayn Rand’s Atlas Shrugged ran five pages, but I’ll try to summarize it more succinctly. Money symbolizes trust between individuals.

When a private individual or criminal syndicate does the same thing, it is called counterfeiting. Both actions have essentially the same effect of decreasing the value of every other dollar in existence.

Before money, individuals bartered that which they were able to gather or produce for things they wanted from other individuals. The value of the items bartered directly reflected scarcity and desire—the economics of supply and demand were immediate. Money, in the form of precious metals or paper currency, replaced perishable goods as a storage medium, a battery in which a person can store the value of their labor so they can spend it sometime in the future. Value created today is stored in money so that it can be used later.

Individuals using money instead of direct barter agreed that the money they were using had a specific value and the goods or services to be exchanged were priced accordingly. US currency bears the motto “In God We Trust” in part to recognize the faith we have in each other in contributing a portion of the value to each and every dollar in existence.

When the Federal Reserve prints a bunch of new money, increasing the number of dollars in circulation in the economy, it is called expanding the money supply. When a private individual or criminal syndicate does the same thing, it is called counterfeiting. Both actions have essentially the same effect of decreasing the value of every other dollar in existence.

Another way to understand the idea of money, consider a publicly traded company like Apple. When Jobs and Wozniak started Apple in the garage, they owned it lock, stock and barrel. The company eventually grew and the small group of people by then who owned Apple decided to take the company public. The owners determined what the company was worth and, on paper, sliced it up into very tiny pieces. Each of these pieces was a share in the ownership of Apple. The stock certificates issued by Apple are essentially money based on an Apple standard instead of a gold standard.

When the value of Apple rises, the value of each share rises. If Apple decides the price of its shares are too high, in terns of dollars, it can announce a stock split to break each of the existing shares into smaller, more affordable pieces. If I owned one share of Apple worth $1000 and the company announced a 4-for-1 split, my investment would still be worth $1000, but after the split I would have four shares each worth $250.
Warren Buffett’s Berkshire Hathaway is famous for never having split their stock. A single share of the company is currently worth over $118,000. When Buffet took control of Berkshire Hathaway in 1963, a single share cost $18. The difference between owning shares in either of these successful companies is the difference between having a $100 bill in your pocket or five $20s.

The power the government has enjoyed since 1971 to expand the money supply is akin to announcing a stock split on the dollar, but with one significant difference—the government keeps all of the newly split dollars. The value of the individual dollars you own drops like the split share, but the government doesn’t give you additional dollars to maintain the value of your investment.

When the Federal Reserve expands the money supply, it takes a sliver of value out of every dollar in existence to give his new dollars value. Any dollar that was earned or saved or invested prior to the expansion of the money supply is suddenly worth less than a dollar. If there were $10 trillion in the US economy and each was worth $1.00, then a $1 trillion expansion of the money supply would rob roughly 9 cents from every existing dollar. There is a word to describe the act of the government taking money from the private citizens and businesses: taxation.
During the GOP primary campaign, much was made about Governor Romney’s tax returns and his effective tax rate relative to someone like Warren Buffet’s secretary. It would be interesting to calculate how many times the money supply has expanded over the years since the former governor earned his fortune, and now much value was taxed out of each of his invested dollars. I would be willing to wager that Romney has paid more than his fair share with this invisible tax.

A detailed explanation of the beneficial effects of the gold standard can be found in the excellent book How Capitalism Will Save Us by Steve Forbes and Elizabeth Ames. From that book, I offer the following from University of Missouri historian Lawrence White: “A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine the growth in the stock of fiat money.”

I think Thomas Jefferson put it best in his 1816 letter to John Taylor: “I sincerely believe, with you, that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

Tom Grace is a No. 1 internationally bestselling author (AP) and an architect in private practice. His sixth novel, The Liberty Intrigue, is a political thriller set in a present-day US presidential election. Follow him on Twitter @tom_grace and his website

Have a tip we should know?

Filed Under: