A return to the gold standard has an appeal on the surface -- because it would prevent the government from printing money on whim -- but in practice it would only compound United States economic problems.
It would make the value of the dollar depend on how much gold is mined and traded. As a result, it would tie our hands in dealing with inflation and recession and put the US at the mercy of events and actions abroad.
If new gold were found, for example, our money supply would increase, and the US economy suffer a burst of inflation. This happened time and again in the 19 th century, when the US was on the gold standard, and gold discoveries were made from Africa to Alaska.
On the other hand, whenever the gold supply dried up, relative to demand, farmers, industry, and consumers ran out of purchasing power. Recession, and even depression, were the inevitable consequences.
The truly chilling prospect is that the US could be held hostage not only to the discovery of gold but to deliberate actions of foreign governments. As it happens, the soviet Union and South Africa -- neither of them a reliable ally -- are the major producers of gold in the world today. The Soviet Union controls very large reserve stocks.
Both are capable of making mischief for the US. By pumping gold into world commerce, they could bring on worldwide inflation. Or by putting an embargo on gold they could plunge us into a depression.
Moreover, a gold standard would mean that we would be guaranteeing these producers dollars for their gold any time they wanted. The US would also be providing them the profits for their production. As a result, South Africa and Soviet Russia could become, in effect, the world's biggest recipients of US foreign aid.
Another problem with the gold standard is that it could cause high interest rates across the nation. Expending our economy's real output would call for increases in the money supply. But a finite supply of gold inhibits this expansion. The Federal Reserve would be tempted to raise interest rates to attract gold from abroad.
Sadly, adopting the gold standard would not even guarantee against excessive money creation. If the US wanted more dollars in circulation to finance economic growth, there would be a temptation to modify the gold standard so that , for example, only 90 percent of a dollar would have to be backed by gold. Another time, the US could lower the standard to 80 percent. The US government would be just as capable as it is today of running deficits; the Federal Reserve Board could still issue bonds and incur debts. All in all, a return to the gold standard, far from solving current US economic problems, would create a lot more.
What is really needed is the political will to get control of the budget, to manage the money supply responsibly, and to have in place a strong anti-inflationary program. Without these, the gold standard will not work. With them, it is unnecessary and harmful.