"Reaganomics"=The Gold Standard

The phrase "gold standard" really has two meanings which are in some ways different even opposite

1] "Gold is money" so the government has to back its currency with bullion

2] "Gold is a really good barometer" This version has been advocated by some of the supply side gang. What it means is that government will pledge itself to convert currency into gold at a fixed exchange rate.

Is number 1 and number 2 a distinction without a difference. Oh no there is a big difference. Advocates of position number two want the government to own very little bullion. The idea is the gold standard will force a monetary policy that will force the price of gold to remain stable which its advocates believe will result in near perfect price stability aka zero inflation. If the government had a large stockpile of bullion it could cheat for a while by selling it in quantity.

OK this raises 2 questions. Will a gold standard produce zero inflation? And more importantly is zero inflation desirable. The current consensus is no. Economies work best with very most rates of inflation somewhere in the 2 to 2.5% range

I suppose I should set some things in stone then.

In 1978 or 1979 or even 1980, the Republican candidate in 1980 gets an economic adviser named John Q. Goldstein, who advocates a return to the gold standard, as described in #1. The Republican wins in a close election over Carter (1-20 electoral votes), as there is some heavy murmuring about exactly how competent the Republican economic team is.

Goldstein's plan can't be put into place on the Republican's inauguration day, obviously, as the country simply doesn't have enough bullion. As Goldstein is obviously not the only economic adviser, the decision is made that while bullion is purchased from abroad (much of it from South Africa, which causes quite a stir) and until a "reasonable" ratio (say, 50% of M2) can be covered by gold, the nation will operate off of the gold standard as described in #2. This is declared to be a good idea because the inflationary spiral of the 1970's will be brought to a complete halt The non-Goldstein advisers think that his gold standard plan isn't a good idea, and hope that this transitional phase can be kept indefinitely without tying the country down to the traditional gold standard.

This plan is enacted in 1981, and a goal is set for the United States to transfer to the full-on cash-converted-to-gold-if-desired gold standard for 50% of M2 by 1989, with acquisition of bullion being made as necessary. What happens now?
 
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