Conservatives should take this opportunity to swear off the paper dollar standard and monetary micromanagement for good. This needed catharsis will allow the founding republican principles of limited government and human fallibility to inform our monetary policy. As always, the world is looking to the United States for leadership. If we do not begin to return to the simple, transparent workings of the international gold standard, where the world’s final money once again is something of independent value, the future not just of money but of global capitalism itself is likely to be cast into even greater doubt than we’ve seen so far.
In order to return to the gold standard, the Fed would have to buy enough gold to make the peg credible. Right now M2 is about $2 trillion, and our gold reserves are about 15% of that. So to be credible we would have to get to around a 40-50% backing, or about $1 trillion of gold purchases. As the Fed seeks to buy $1 trillion of gold, its price will shoot up in dollar terms. So instead we would have to buy maybe $2 trillion, or $3 trillion. We would suck up gold from all over the world. The Fed would raise interest rates to maintain the dollar’s value against gold. We would experience a massive deflation (see the UK in the twenties), resulting in depression, revolution and communism. And, in the end, we would fail at the objective of buying enough gold to have a credible peg. But we would not care, because we would be communist and destitute.
But who cares? It’s only monetary policy.