For almost as long as civilization has existed, certain metals have been deemed valuable for their unique characteristics, including gold and silver. Besides being a lustrous color, gold is one of the most malleable metals found in nature and is an excellent conductor of electricity. Combine those qualities with gold's resistance to oxidization, inability to tarnish, and overall scarcity and it isn't difficult to see why this particular metal has become the most sought after commodity. Gold is essentially the universal currency.
Silver is also a precious metal that is widely circulated and exchanged, being considered of great value for many of the same reasons as gold. Silver, incidentally, has the highest conductivity of any metal (and according to some, can be used to kill werewolves).
For many years, American currency was based on a gold standard and silver was used in coinage and often proposed as part of a "bimetallic" monetary standard. The United States is no longer on a gold standard, but recently, fervor has surfaced about a possible return to a currency backed by a precious commodity.
So, if the U.S. isn't on a gold standard, what exactly is guaranteeing the value of a dollar? The answer: nothing. Paper money issued by the United States of America is only worth what people and other governments believe it's worth.
Years ago, paper currency could be redeemed at banks for actual silver or gold. Most coins used to be made primarily of silver. Not anymore. And no longer can you receive specie for paper. Even if a person has a certificate from the days of old, the U.S. stopped redeeming them in 1971.
Who's leading the charge for the return to a backed currency? None other than the darling of libertarians, Congressman Ron Paul. Among other issues, Paul contends our current paper standard will cause hyperinflation and hence, chaos among the masses that could end up like the Weimar Republic days back in Germany.
Paul does have a sizable number of followers, though, and his ideas aren't without some merit. The thought of our currency having a stable value would be beneficial. Currently, several nations own American debt or have reserves of American dollars. What if they dump those onto the market in large quantities? The value of the dollar would take a serious hit.
Additionally, Paul isn't asking for a return to the old standard of gold. He is asking for a return to having a certificate that could guarantee an exchange for gold or silver on demand. However, Paul is altering the system from the way it was. Paul also advocated for another system that would allow Federal Reserve Notes to be continued in circulation and letting private mints produce gold and silver coins. His hope is the people can determine what they want to use as currency -- the money business should be open to competition.
Reverting back to the gold standard would have some other values. For example, having currency backed by a standard unit, such as gold, would mean that the circulation of paper certificates would have to be strictly monitored to keep from devaluing the certificates. The silver and gold would have to be available for demand. This, in turn, would control government spending. The federal government wouldn't be able to print paper for that which they couldn't guarantee the value.
Though the congressman's proposal has some merit and would perhaps create a more stable dollar, I'm not convinced it would be the best move for the U.S. The amount of value for the gold in world is estimated to be somewhere close to $5 trillion, which falls well short of all the dollars in circulation in the country today. What would we do? Contract the money in circulation? Ironically, Paul and gold standard disciples would need the Federal Reserve Banks to take care of that task.
Pulling so much money from the market and introducing private coinage could present a problem for the nation. Allowing private mints to create gold and silver coins would require some oversight to guarantee the purity of the metals and even then, counterfeiters would have an easier time duplicating metal coins as opposed to the paper standards we have now.
Paul also believes gold and silver are the only forms of currency permitted by the United States Constitution. I find no passage or clause in the Constitution that documents such a claim. Article I, Section 8, Clause 5 of the Constitution specifically allows Congress: "To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures."
If Paul is using this clause to back up his gold and silver claim, he should look somewhere else. The words silver and gold not only don't appear, but to "coin" (as a verb) means to form by stamping, punching or printing. In no way does this guarantee only a metallic form of currency.
I also find it very strange that Paul advocates for allowing private mints when that same clause of the Constitution mentioned above makes a strong implication that only the United States government has such an ability. Any legislation that would permit coinage of money would and should be struck down by the courts.
Congressman Paul and his followers would have Americans believing that hyperinflation is right around the corner and this isn't the case. The nation has operated off the gold standard for some time now and done so successfully. The value of the dollar is above all other currencies, save the British pound and the Euro. Nations still remain willing to loan the United States money and purchase our bonds. Though the nation's leaders need to make some difficult decisions with respect to the budget and spending habits, the current system of using paper notes from the Federal Reserve Banks is more than adequate.
Moreover, I can't understand why those advocating this new gold standard believe every industry must be competitive. Does anyone really believe we need to allow currency to be in the hands of anyone other than the government?