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(ARND WIEGMANN/REUTERS)
(ARND WIEGMANN/REUTERS)

Why the gold standard is not coming back Add to ...

It worked for Ronald Reagan. The Republican party is hoping a promise to consider a gold standard for the dollar will help Mitt Romney win the White House in November.

Gold is back in fashion. Google’s book search tool shows gold was last mentioned this often in the early 1970s when the gold standard finally ended.

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It is easy to see the appeal of tying the currency to gold. In 1776 gold was $19 an ounce, according to Global Financial Data. At the start of 1933 it was $20.67 an ounce. The dollar maintained its buying power for a century and a half. Only in 1971, when president Richard Nixon scrapped the last vestiges of the gold standard, did inflation really take off.

This is one of gold’s strong features: monetary expansion is limited by the slow growth in gold supplies, so widespread inflation is unlikely. Also appealing is to limit the ability of politicians to print money to spend beyond their means.

Unfortunately, these features are both part of gold’s unsuitability as a base for money. The first problem is that during a boom the ever-inventive financial sector always finds ways to expand the money supply - private banknotes, discounted bills, futures, credit default obligations and so on. When the bust inevitably comes, the only way to avoid depression is to create public, or paper, money. Even in the gold standard’s heyday when the Bank of England acted as its guardian, rules on gold backing for paper had to be suspended after each bust.

The second problem is that in a crisis politicians simply abandon gold. Two Republican presidents dropped the gold standard, during the US civil war and Vietnam, in order to escape its restrictions. A Democrat did so during the Great Depression. If speculators sense weakness they will hold gold rather than dollars - and America’s financial troubles are bigger now than in 1971. The gold standard is not coming back any time soon.

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