GOP Longshot: Ditch the Fed and Go Back to Gold

The new money system would involve competing private banks like American Express(AXP Quote) issuing their own paper money backed by gold bars, Paul said. Holders of paper currency could redeem the notes for gold at the issuing bank or exchange them for notes printed by different institutions.

The idea of the gold standard is neither new, nor without merit. It had its heyday in the 19th century with Britain's Bank of England at the center of the financial world order. Under the system, each country's money supply expanded or contracted depending on how much gold its monetary authority held.

Because there is little or no flexibility to the arrangement, money can't be created at government's discretion, keeping inflation in check.

For all its merits, however, the system broke down around the advent of World War I. Repeated tries at keeping a gold standard were made, but each eventually failed, most recently in 1971 when President Richard Nixon made the decision to leave the system.

While the gold standard's inflexibility is often touted as a strength, others view it as a hindrance to economic growth.

"Under the traditional gold standard, you have fixed exchange rates and free mobility of capital, but you give up domestic monetary policy," says Robert Wright, professor of economic history at New York University's Stern School of Business. "That's why the 19th century is the heyday of the financial panic."