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Gold Standard Comeback Enjoys Support

Thursday, 1 Sep 2011 | 12:32 PM ET
Gold Rush: The Gold Standard
CNBC's Steve Liesman with a look at the sagging U.S. dollar and putting the nation back on the gold standard, with James Grant, Grant's Interest Rate Observer.

An age-old idea — the gold standard — is attracting new fans, amid growing investor concern that enormous government borrowing is weakening the dollar and spark hyper-inflation.

The day of realization is coming, James Grant, editor Grant's Interest Rate Observer told CNBC Thursday. "What can be said for the gold standard is that it is time tested. It has monetary properties. It worked imperfectly but consistently for a 100 years until it was interrupted," said Grant

The old standard, which fell out of use by the 1930s, was conceived to control money supply growth (and thus inflation and asset bubbles) by requiring currencies be backed by physical gold.

The concept has gained new currency in the wake of the 2008 financial crisis wherein governments and central banks tried to stimulate economic growth through extraordinary fiscal and monetary stimuli.

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"The human society is going to recognize that current monetary arrangements are defective and are robbing us of the dynamism that this country has been known for," Grant noted.

According to Grant, under a gold standard, a given country can fix its currency to a given quantity of gold. However, in an event of a recession, governments would be powerless to print money under the gold standard.

"Under a proper gold standard the government would have to fund itself and the open market would not do it," he concluded.

Gold and Other Money Metals - A CNBC Special Report
Gold and Other Money Metals - A CNBC Special Report

The gold standard would limit the amount of debt the government could issue, Grant said.

"What we want is a monetary system that is objective, that we can understand, that has at its bottom as its root — something that we can recognize as money. Gold is recognized as money," he added.