Why Doesn't the U.S. Return to the Gold Standard so that the Fed Can't "Create Money Out of Thin Air"?

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Letter Writer:

Gopinath Pulyankote, IT manager in Santa Clara, Calif.

Date Posted:

Nov. 7, 2012


Continuing with the answer given to the gold standard question, here's a follow-up question Isn't it a fact that all the major currencies of the world are no longer based on the gold standard (since Aug. 15, 1971)? Doesn't this mean that the United States, which as a sovereign nation and the sole issuer of the dollar, no longer has to borrow gold in order to create its sovereign currency? Which leads to the fact that the United States cannot ever run out of dollars. The only limit on creating dollars out of thin air is the fear of inflation. The Fed targets this by managing the interest rates and by bond purchases. Isn't this true? Why doesn't the Fed come out and say these in clear terms and in plain English so that the citizens of the United States can understand? By being silent, the Fed is feeding the debt hysteria that is gripping this nation and destroying its productivity and creativity.

Author's Response:

Not only is it true that major currencies of the world are no longer tied to the value of gold, I think it is reasonable to assume that this knowledge is widespread. The great peacetime inflation of the 1970s showed U.S. citizens what happens with excessive money growth. Thus, I think you go too far in suggesting that the Fed is somehow keeping this knowledge suppressed. Please go the Fed's web site for more information; see here: http://www.federalreserve.gov/pf/pf.htm

The Fed's main goal, publicly announced, is to keep prices "stable" in the sense of maintaining an inflation target of 2 percent. I am not sure what you mean by suggesting
that the Fed's silence along the gold standard dimension is feeding a debt hysteria. The concerns with debt have to do with the fact that Congress continues to approve
deficit spending, with the debt to GDP ratio rising rapidly to unsustainable levels. The Fed is not promising to monetize this debt, as long as one believes in the 2 percent inflation target. If the Fed were to use its powers to create money out of thin air to monetize the debt forever, then history tells us that holders of U.S. dollar-denominated securities will be subject to a heavy inflation tax. The Fed believes that taxation should be left to an elected Congress, not an unelected body in charge of maintaining a smoothly operating payments system.

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