Gingrich thinks his latest idea is as good as gold

If Newt Gingrich gets his way, Fort Knox is in trouble.

The Republican presidential contender says he favors the creation of a committee to consider returning the U.S. to a gold standard as a means to prevent inflation and curb government overspending.

On Friday, Gingrich said he would name Lew Lehrman and James Grant, two well-known financial figures, to a Committee on Gold if he wins the presidency.

“While I am not presently committed to any one version of reform, if elected I will be eager to work with Lew Lehrman and Jim Grant in achieving a dollar that once again can hold its purchasing power for many decades to come,” he said in a press release.

Gold has a long history as a store of value and the U.S. was on a gold standard from 1946 to 1971. During that period, one ounce of gold was worth $35 in U.S. currency. Holders of dollars, mainly foreign governments, could even exchange the paper currency for actual gold.

And that’s exactly what they did in the late 1960s as rising U.S. inflation eroded the value of the dollar. The result was a run on gold: paper dollars flowed in and gold flowed out, pushing President Nixon to take the U.S. off the gold standard in 1971. The move contributed to global financial turmoil in the years that followed.

Returning to a gold standard now, however, is virtually impossible. Aside from Ron Paul, a gold advocate, few politicians in Washington support the idea. Nor do the vast majority of economists. There’s even less support overseas. Governments don’t want to be limited in the amount of money they print by a source of metal that’s in short supply.

If the U.S. went back on a gold standard, the government probably would have to set the exchange rate at an extraordinarily high level, potentially damaging the economy in the short run.

Otherwise other nations such as China would quickly exchange their excess dollars for gold and drain the bullion out of Fort Knox, where much of the nation’s yellow metal is stored. – MarketWatch

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Posted by admin on Jan 21 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry