And then of course, some people actually say that being rascist doesn’t mean Ron Paul a bad candidate. But his economic policy isn’t exactly cheerio, either. He wants to go back to a gold standard, see, which has been proven not to work (See: Great Depression).
And this is why.
The US converting to a gold standard would require them to re-issue all currency in circulation as a fixed amount of gold. Since the US government doesn’t have a lot of gold, it would mean a lot less currency. Thus, they would need to purchase gold — as a result, the price of gold would skyrocket. The US government would have to sell assets in order to purchase the now absurdly expensive gold, or run a deficit. Taxes would be forced to rise to finance this.
However, this would be pointless, since approximately 1 trillion dollars of goods flows out of the US economy every year. Thus, the economy would literally bled gold bullion. The only way to balance out is a recession, so deep and crippling, that it would eliminate the US trade deficit.
Okay, the regulatory mechanism for the gold standard works like this. Suppose we have two countries, A and B.
Now, for whatever reason, country A is on the gold standard. It doesn’t matter what country B is on. Now, A and B buy and sell goods to one another. In order to buy and sell goods, the people in these countries need to purchase currency from one another to buy them.
When an economy buys things from another economy, they need to purchase money from the other economy to buy goods. So, for instance, country A needs to buy country B’s currency (call it B$) to buy goods from country B. And vice versa.
Now, as they buy and sell, there usually will be an imbalance been how much people buy and sell in a given country. For instance, country A may be buying more from country B than it is selling. This leads to an imbalance in the currencies, because people in country A will be buying up B$ and selling A$. When it all comes out in the wash, there is a surplus of A$ on the market — that is, the demand for A$ is lower than the amount supplied.
Now, people will work to correct this surplus, because it’s pointless for them to have A$ sitting around no one wants to own. In a quasi-fiat system of freely traded currencies, the exchange rate does this. Bankers and financial dealers adjust the relative values of the currencies to make the “price” of A$ optimal. Currencies wax and wane in value based on their economies and variety of other complex mumbo jumbo which doesn’t really matter here.
However, in the gold standard this doesn’t happen, because A$ are linked to a fixed amount of gold — that is, a commodity. Instead, people who hold A$ start redeeming them for gold, in order to sell them as a useful commodity. As a result, Country A’s stockpile of gold, which they use to back their currency on, dwindles. In turn, the supply of money for country A falls.
Not enough money is circulation causes the economy to constrict, since doing basic business becomes increasingly difficult. It also can cause deflation, and a host of other problems. In short, the only way for A’s domestic economy to come into equillibrium is for it to crash. Businesses shut down, and domestic demand for goods slows as the economy stalls.
While this is a bad thing, it does do one very good thing. If you have no money, because the economy is in recession, you can’t very well afford to buy items from country B. Thus, the supply of A$ on the market falls, and people stop redeeming the excess for gold. The process brings the two markets into equilibrium again, and all is well in the world of international commerce.
Of course, the side effects are not exactly pleasant for people in country A.
Walking through Glass 
I’ll give you two more:
1) it is a very soft metal, so if makes bad tools
2) you can’t eat it
“Not enough money is circulation causes the economy to constrict, since doing basic business becomes increasingly difficult. It also can cause deflation, and a host of other problems. In short, the only way for A’s domestic economy to come into equilibrium is for it to crash. Businesses shut down, and domestic demand for goods slows as the economy stalls.”
Good point well made about the difficulty in moving from the current system to a gold standard, but the flaw you pointed out regarding a gold standard itself isn’t fair I don’t think, and you ignore the comparison with the now hopefully very apparent flaws in the present system.
If the currency is backed by gold, gold is acting as money not as a commodity. In this scenario, country A’s money supply has decreased (country B was making more useful stuff). This means within country A’s economy, yes there is less money in country A (reflecting the fact they spent it on country B’s tat, so country B is holding it). This scarcity then causes A’s economy to restructure, or save more, leading to an eventual correction of the imbalance (country B has more to spend). The value of the currency relative to consumables/services within economy A increases. The “crash” does not occur, rather it is a gradual braking process.
The money supply is acting as a steadying hand. The value of goods and services in each economy floats against the currency. If there is less money/gold in circulation, there will indeed be a deflation, but not relative to country B’s currency, meaning money will eventually flow the other way. It is a self-correcting system – sound money. What we currently have is a self-destructive system – fiat money (country A spends all its money on tat, and then borrows or prints more to spend on more tat devaluing the currency (e.g see dollar value relative to 30 years ago), distorting the economy (e.g Iceland and to be honest half the globe), impoverishing current and future generations (e.g. UK/US), with nothing but human conscience standing in the way (or not, e.g. Fed/Paulson)).
What if country B deliberately buys A’s currency to try and cause “deflation” ? Won’t work. As they buy more gold or currency A, the exchange rate will simply increase. Similarly, the value of goods relative to currency A in economy A will decrease, creating scope for gold/currency A to flow back the opposite way. They don’t simply “redeem” the currency. If free trade exists between the countries, the value of gold in terms of other things will be higher in country A – so thats where B will start spending it. The currency is backed by gold – ie its just representing gold. The point is not gold, simply that the money supply is finite. Since man has repeatedly proven himself incapable of maintaining a steady fiat supply (read any monetary history for thousands of examples), backing with a finite commodity that can’t be “printed” is the best means of achieving this. And its certainly many leagues ahead of creating money as a debt at source as happens now.
What if economy A grows in size? The value of money is increased, but its evenly increased. The idea this is a problem is a myth, and the money is simply divided into smaller units if required (for a good example see Roman currency in Britain after the collapse of the empire).
If country A spends all its money in country B, there is kickback. Yes they will suffer in the short term, but so they should – they just spent all their money. The big idiots. The system enforces sensible spending, and encourages a well-balanced and productive economy. Competition for a finite source of money, through the spending of our wealth (our labour), would be a powerful and positive force. Instead we all spend our time running against the treadmill of interest and devaluation to the benefit of few.
riverbird’s point only further enhance’s gold’s validity in this role. Yes, its relatively useless in industry and tastes rubbish on toast, hence it has a stable supply.
Um having just reread the last paragraph, you actually point out what I’m saying so we basically agree. So why is this post called “why gold is a bad idea” ? Are you saying the side-effects of that are worse than whats happening to us now?