The glitter of gold has provided some added luster to the Republican primaries in the past couple of weeks, as Newt Gingrich recently suggested it might be a good idea to re-establish the link between the value of the dollar and gold.
"I would appoint a commission to look into gold and to look into hard money, because a dollar you save today ought to be worth a dollar 30 years from now," Gingrich said while recently campaigning in South Carolina.
Of course, Gingrich isn't the first of the Republican candidates to suggest a return to the gold standard. That distinction goes to Texas Rep. Ron Paul.
"Since 1971, since we lost our link to gold, the dollar has lost 85 percent," Paul said recently on NPR. "So if you were a saver and wanted to take care of your kid's education, even if you made a little interest, you're going to lose money."
For decades, Paul has also argued for a return to the gold standard, a link that was most recently broken by President Richard Nixon in 1971. In fact, Paul was a member of the Reagan administration Gold Commission in the 1980s. Despite his advocacy, it voted against a return to a monetary system based on gold.
But there's considerable disagreement about whether it's a good idea to return to the gold standard.
The Original Money
Pundits have suggested Gingrich came to appreciate the gold standard to attract some Ron Paul supporters. However, Gingrich's support for the idea goes back to his days in Congress when the supported the 1984 Gold Standard Act.
Gingrich has said his commission would be co-chaired by investment banker Lewis Lehrman and Jim Grant, a respected Wall Street publisher.
"I have no idea about what Mr. Gingrich is thinking. I simply don't know his political calculus in this, but I think it's high time that someone in American politics raised the question and helped us form the debate about fundamental monetary change," Grant says.
Grant says the argument for gold begins with its role as the original money.
"People recognize it as such. You don't need a Ph.D. in economics to have it explained to you. Gold is sort of the Muhammad Ali of monetary substances; the world over, you look at it, you know what it is," Grant says.
Pegging the dollar to gold would limit inflation, he says, and force greater fiscal constraints on governments because they couldn't simply print money to pay their debts or bail out bankers. And, he says, it would bring the kind of stability to the monetary system that it had a hundred years ago.
But economist Simon Johnson, former chief economist at the IMF, reads the history of gold differently.
"Saying, 'Aha, going back on gold will solve our problem' is magic, and in the real world, magic doesn't exist," Johnson says.
First, says Johnson, there's a fallacy in the idea that your dollar has a fixed value relative to gold.
"First of all, the supply and demand for gold around the world changes. It changed a lot during the 19th century, so there were big fluctuations in value from that," he says. "Secondly, the dollar was convertible into gold — except when it wasn't."
In the 1800s, before U.S. greenbacks became dominant, banks would issue currency backed by gold, but in financial panics, that convertibility was often suspended. And, says Johnson, being under the gold standard does not necessarily force governments into fiscal rectitude. That was obvious back in 1812 when the British attacked Washington and burned the U.S. Treasury.
"The only good news for the Americans the day the British burned the Treasury was [that] there was nothing in the Treasury. The country was completely broke," Johnson says. "You could absolutely drive the country into the ground, ruin public finances and face the awful consequences even under the gold standard."
Still, Johnson says he welcomes the debate over the country's monetary policy sparked by the call for a return to the gold standard. While he argues gold is not the answer, he says U.S. monetary policy needs to be reformed so powerful interests like the big banks can't take advantage of it.