I need help in better understanding Ron Paul's gold standard solution.

[FreeMarketEconomy]

I would like to thank you in advance for helping me in understanding Ron Paul's gold standard solution.

I currently understand the main reasons as to why RP wants to move towards the gold standard. Although, I do have particular questions regarding his desired shift towards the standard. And, how exactly would a shift to the gold standard facilitate economic growth.

Would the shift towards the gold standard be instantly, and if not what are the steps towards the gold standard transition?

Would gold be pegged to a currency or would gold be the actual legal tender?

Would there be a restriction on gold for jewelry, developing technologies, and/or other potential uses for gold?

Would there be a restriction on the mining of gold?

Would there be an allowance of leverage like the fractional reserve system?

Would people be able to borrow gold for things such as to pay for school, buy a house, or start a business?

Would there be an allowance deflating or inflating the gold supply to better enhance our economy relative to the rest of the world?

Would it also be mandatory for the rest of the countries in the world to get on the gold standard? And, what if countries refuse to get on the gold standard?

Would there be a necessity to control how much gold each country is allowed to use, especially if a country is rich in gold production?

Would something be done to help put the focus away on how much gold we have and must have towards business and economic growth?

[sratiug]

I would like to thank you in advance for helping me in understanding Ron Paul's gold standard solution.

I currently understand the main reasons as to why RP wants to move towards the gold standard. Although, I do have particular questions regarding his desired shift towards the standard. And, how exactly would a shift to the gold standard facilitate economic growth.

Would the shift towards the gold standard be instantly, and if not what are the steps towards the gold standard transition?

Would gold be pegged to a currency or would gold be the actual legal tender?

Would there be a restriction on gold for jewelry, developing technologies, and/or other potential uses for gold?

Would there be a restriction on the mining of gold?

Would there be an allowance of leverage like the fractional reserve system?

Would people be able to borrow gold for things such as to pay for school, buy a house, or start a business?

Would there be an allowance deflating or inflating the gold supply to better enhance our economy relative to the rest of the world?

Would it also be mandatory for the rest of the countries in the world to get on the gold standard? And, what if countries refuse to get on the gold standard?

Would there be a necessity to control how much gold each country is allowed to use, especially if a country is rich in gold production?

Would something be done to help put the focus away on how much gold we have and must have towards business and economic growth?

Dr. Paul has introduced a bill to allow competing gold and silver currencies from whatever source. This would allow real money to gradually replace the worthless paper. I think he prefers they be measured in weights. Federal legal tender laws are unconstitutional, but they only applly to debts, not purchases. anyway. .

[clowns789]

Has Dr. Paul ever said anything about the Money Masters video? Bill Still says that fiat currency is okay as long as fractional reserve banking is banned. Do you think Paul would support a constitutional amendment legalizing fiat currency if there is a provision against fractional reserve banking?

[Mini-Me]

I would like to thank you in advance for helping me in understanding Ron Paul's gold standard solution.

I currently understand the main reasons as to why RP wants to move towards the gold standard. Although, I do have particular questions regarding his desired shift towards the standard. And, how exactly would a shift to the gold standard facilitate economic growth.

Technically, Ron Paul does not exactly support a return to the gold standard, so to speak. Rather, he supports the abolition of legal tender laws requiring Federal Reserve Notes to be accepted as payment, along with the abolition of capital gains taxes on precious metals like gold and silver. That way, people would be able to freely choose to use them as a medium of exchange.

Have you ever visited the website www.goldmoney.com? What would happen under freely competing currency is this: Any businesses or people who want to receive gold as payment instead of FRN's would be entirely free to do so. In other words, they would not be forced to price goods and services in US dollar amounts and accept FRN's as payment. Slowly, over time, more and more people would freely start doing this as a way to avoid the inflationary risks that come with fiat currencies, the US dollar in particular. As more and more goods and services became priced in units of gold rather than in dollars and as more and more people started using gold, the demand for gold would significantly increase, since it's being used as a currency/medium of exchange. Obviously, this would mean that its price in dollars would rise. If gold is the only currency people decide to use (unlikely, since silver will also be somewhat popular), its demand would eventually go so high that it would be worth approximately $110,000 an ounce by the standards of today's dollar. Of course, as gold grows in demand, dollars would become less desirable and less valuable, and they'd eventually just fall into disuse entirely.

In other words, allowing competition in currency would result in a slow and gradual shift from dollars to gold. With that said, I'll try to answer your specific questions, if they're still applicable...



Would the shift towards the gold standard be instantly, and if not what are the steps towards the gold standard transition?
Although I might be wrong, I do not believe there's a workable way to instantly switch to a national gold standard, and if I recall correctly, I believe Ron Paul believes the same. Under a government that allowed competition in currency, the shift would be gradual and at the sole discretion of players in the market.



Would gold be pegged to a currency or would gold be the actual legal tender?
Unless an actual gold standard was instated (doubtful and probably not desirable), I suppose gold (and possibly silver and other precious metals) themselves would be simply considered legal tender. That said, I'm not sure if the term "legal tender" really applies, because it carries the assumption that people are forced by the government to accept anything designated legal tender as a payment of debt. During the transition period at the very least, and hopefully afterwards as well, payment of debt would simply be a matter of private contract. (In other words, if you order food at a restaurant, you pay in whatever currency the food is priced in. If you borrow money from a creditor, you pay it back in whatever currency your contract with your creditor requires.)

If you're asking whether people are going to be walking around with coins in their pockets: Yes and no. Certainly, people would be allowed to, since gold would be the prevailing currency and many/most goods and services would begin pricing themselves in terms of gold grams, milligrams, etc. (although I'm sure many would accept silver as well or possibly some other market-determined rare commodity). However, especially as gold became more valuable, it would not be very convenient to carry around. Instead, either the government or private insured companies (perhaps banks) or both would physically store gold and issue certificates of deposit, which would be redeemable at any time for gold. Some of these banks would work as safety deposit boxes I'm sure, whereas others would work as commercial fractional reserve banks do today, where deposits are loans from customers to the bank used to finance loans by the bank. In any case, balances of gold on deposit could also be electronically transferred between banks (or whatever you'd call similar holding companies), and the actual gold would be transported between such companies regularly (so they can ensure they and their customers aren't getting screwed). If anyone's became fraudulent by issuing more certificates than they have gold on deposit, they'd quickly go out of business. There's always a risk of that, but it's certainly better than the centralized risk that comes with a fiat currency, and I think that risk would also be greatly mitigated by the fact that banks/holding companies would require physical transfer of gold soon after electronic account transfers.

So, in other words: We could still very well end up using paper notes and electronic credit/debit cards. The difference would be that items would be priced in terms of gold rather than dollars, and that because the supply of gold is limited, a central bank cannot inflate the base currency on a whim.



Would there be a restriction on gold for jewelry, developing technologies, and/or other potential uses for gold?
Certainly not. :) It would become very uneconomical to use gold for those purposes though, considering just how much the demand for gold would rise. Gold jewelry would gradually become immensely valuable, and I think people would start looking at other ideas for wedding rings. ;)



Would there be a restriction on the mining of gold?
Certainly not. :)

It's true that minor currency inflation and deflation can occur when gold is used as a currency. The advantage though, is that over the long-term, gold has a relatively stable supply. Its supply does gradually increase as it is mined, but I think that's tapering off anyway. In any case, this is still significantly better than worrying about a central bank recklessly inflating a currency on command, however...which I think we've noticed tends to happen with all fiat currencies over time. Historically speaking, central banks and governments just don't have self-control when they can control the money supply. :-/ When it comes down to it, people do not really have a right to value of property. The value of your home can go up/down based on supply and demand, and that's totally valid. The value of currency can go up/down based on supply and demand, and that's equally valid so long as the currency is freely chosen. The reason inflation is so evil under our current system is because we're forced to use US dollars, yet the central bank creates new money at will, purposely stealing purchasing power from dollars we're given no choice but to use.

The greatest advantage of competing commodity or commodity-backed currencies is that people can freely choose what to use as money (as long as buyers/sellers agree, etc.). Heck, people would still be able to accept FRN's as payment if they really wanted and if they were worried about a huge gold deposit being found. That said, I doubt many others would accept them as payment after some time has passed, making them pretty worthless. I think that in the end, the market would probably choose at least gold and silver simultaneously, precisely because that would spread the inflationary/deflationary risks of some huge deposit being found or some holding company being nuked by Oddjob from Goldfinger. Another benefit to using both as money instead of just gold is that the value of gold would not climb so astronomically high (~$110,000 an ounce in US dollars by today's standards). This would help decrease the risk of physical gold stores being attacked/stolen. Certainly, any company/government storing rare commodities of significant value would need significant security and significant insurance. That said, a truly significant amount of the money supply would never be in the same place at once anyway, and it would be spread around among a similar number of banks as FRN's are today.



Would there be an allowance of leverage like the fractional reserve system?
I'm sure this would be allowed...it's a perfectly legitimate free market function. There are a lot of people here who decry fractional reserve banking, but the biggest problems with it are:
How the "money multiplier effect" exacerbates the problems the Federal Reserve creates when it "lends" out an arbitrary amount of newly created money ("credit," since our hackneyed system is strangely based on debt).
How bank deposits are so protected and guaranteed by government that people misplace their trust into money that is nothing more than an IOU from the bank who has loaned out the actual money they've deposited. If people only recognized that IOU's are less liquid than cash and acted accordingly, credit expansion would no longer be equated with an expansion of the actual money supply.

That said, these are my opinions. Many people on this board disagree and feel that fractional reserve banking should be outlawed (apparently they believe people are too stupid to be allowed to deposit their money into on-demand bank accounts, and that they must be saved from themselves ;)). Actually, I'm in the middle of a debate with someone right now about that. (http://www.ronpaulforums.com/showthread.php?t=162726) I'm not sure what exactly Ron Paul thinks on this issue, but I'm sure he's written about it somewhere. Because he believes so strongly in the free market and the upholding of private voluntary contracts though, I imagine he'd have no problem with fractional reserve banking within the context of a free banking system.



Would people be able to borrow gold for things such as to pay for school, buy a house, or start a business?

If someone's willing to lend, of course! Money's money, no matter what you base the currency on. I think at the beginning, large banks might be hesitant to switch over from US dollars to commodity-backed currency, and large developments would still continue for a while through dollar loans. The use of gold would probably start at the grass roots and small businesses and start to work its way up from there...though that's just my guess.



Would there be an allowance deflating or inflating the gold supply to better enhance our economy relative to the rest of the world?
Well, nobody can create new gold out of thin air or anything, so I don't really see how this would apply. I may be misunderstanding your question of course, but...because gold could be stored by anyone, not just the government, and any banks could issue certificates of deposit for gold, the physical gold would be moved quite often. Gold held by a bank would be redeemable for a certificate from that bank. Furthermore, any bank receiving electronic credits from another bank would be very quick to call for the transfer of physical currency so they can avoid getting screwed. Because of that, anyone trying to defraud others would likely be caught out very quickly. This is very different from the old "gold standard" during the time of the Federal Reserve, when the gold was basically all stored together and people just had to pray no more dollars were being printed than gold existed to back. The decentralization of storage keeps the system honest. Bringing this up to an international level, I imagine any overseas banks or companies would not wait too long before demanding physical gold in exchange for any electronic credits or certificates they've received as payment (assuming they'll decide to accept them - which, so long as they knew they'd get their gold, I don't see any reason why they wouldn't!).



Would it also be mandatory for the rest of the countries in the world to get on the gold standard? And, what if countries refuse to get on the gold standard?
Under freely competing currencies, it wouldn't be mandatory for foreign countries to do anything (although I can see why you're asking...if we actually did just instate a gold standard outright, international trade could get really ugly unless it was handled perfectly...this is another reason why competing currencies work better than a flat-out gold standard). I have a feeling that countries holding lots of dollars would see the writing on the wall and dump them while they're still worth something (causing hyperinflation and quickening the shift over to gold). In terms of trade with other countries, it just depends on whether they'd be willing to accept gold as payment for goods. I have a feeling they'd be happy to, though. ;) In fact, depending on how important the US market was to the rest of the world, other countries may make a similar shift to commodity-based currency. Whether or not US businesses would sell products abroad depends on whether our businesses would be willing to accept foreign currency or whether foreign customers would be willing to pay in gold. Of course, currency markets would allow for easy exchange between gold and foreign currencies, just as dollars and foreign currencies can be exchanged today.



Would there be a necessity to control how much gold each country is allowed to use, especially if a country is rich in gold production?
Nope...and this is another advantage over suddenly instating a gold standard overnight, as well. Gold-rich countries would simply enjoy the perks of being rich in a commodity high in demand in the US market. There's really not all that much new gold found anyway, but mining would become significantly more lucrative. More importantly, other countries do have significant existing stores, and we'd start to see them spent in the US market. This would probably happen about the same time gold became much more valuable and higher in demand domestically (during the shift from US dollars), and gold's usefulness in the US economy would also push its demand and value up worldwide. Domestically, two forces would be pushing in opposite directions for a time: The gold coming in from other countries would increase the US supply and therefore decrease demand, but the greater number of people using gold as a currency would continually increase the demand...probably much faster than the increased supply would decrease it, I imagine. Interestingly, I think that the gold flooding in from overseas would also speed up the adoption rate, since gold would not skyrocket in value so quickly and it would be more accessible for some time to people looking to switch over from dollars. Anyway, this influx of gold would eventually fade away as world markets came into equilibrium with the US market.



Would something be done to help put the focus away on how much gold we have and must have towards business and economic growth?
No, and because of the gradual and voluntary nature of the shift (gold, silver, etc. becoming more valuable and US dollars becoming less valuable), this wouldn't be necessary. The economy would continue on, and different players within it would shift over to gold at different times as they began to prefer gold over US dollars. I imagine the transition would probably become complete around the same time the international markets basically ran out of gold to sell us, as well.

[Mini-Me]

Has Dr. Paul ever said anything about the Money Masters video? Bill Still says that fiat currency is okay as long as fractional reserve banking is banned. Do you think Paul would support a constitutional amendment legalizing fiat currency if there is a provision against fractional reserve banking?

Frankly, if this is what Bill Still said (I haven't seen Money Masters in a long time), I strongly believe Bill Still is wrong.

To answer your last question, it depends on what you mean. While he probably wouldn't even bother to abolish the Federal Reserve if competing currencies were allowed (just let fiat money wither and die because nobody wants to use it), I know that Ron Paul would never legalize fiat currency as legal tender, where it must be accepted for all debts, public and private. That's because he would not want people to be forced to use a currency that can be arbitrarily manipulated by a central bank, rapidly increasing its supply and causing runaway inflation. The evil of the fiat currency system we're in is that it's so easily manipulated, yet we have no choice but to use it while our purchase power wanes to nothing. Fiat money would be fine if central banks were trustworthy, but they're not...and that's exactly why they have to force us to use their money, since they know we'd choose something else if we could. Through its credit cycle and "money multiplier effect," fractional reserve exacerbates this problem that the central bank causes, but it's actually a perfectly valid free market process (as long as it's entered into by voluntary contracts between depositers and banks, not mandatory and done sneakily like it is today).

To illustrate my point that fiat money and the Federal Reserve are the problem, not fractional reserve banking by itself:
During the 1800's, the United States had a free banking system, under which most banks operated on a fractional reserve. Despite that, we had a general deflationary trend throughout the 1800's! According to the calculator here (http://www.measuringworth.com/ppowerus/?redirurl=calculators/ppowerus/), $2159.81 today buys as much as $100 did in 1913 (when the Federal Reserve was created). In comparison, $78.88 from 1913 bought as much as $100 did in 1800. In other words, even though the 1800's saw plenty of fractional reserve banking, the value of the dollar actually increased until the Fed was created. In comparison, the dollar is now worth less than 5% of what it was in 1913.