For Greenspan, Gold Once Glittered

For most of American history, the dollar has been defined as a specific weight in gold. The Constitution gave Congress the responsibility to maintain the value of the dollar by making only gold and silver legal tender and not to "emit bills of credit." When the Federal Reserve Act was passed in 1913, 20 dollars could be redeemed for an ounce of gold. That ended during the Great Depression in 1933, when gold could no longer be redeemed by the public, but only by foreign governments for $35 an ounce.

The dollar's final link to the gold standard was severed by Nixon in 1971, when the modern era of asset bubbles, federal budget deficits and inflation began in earnest. A return to a gold standard now is far-fetched, as Paul acknowledges, but he proposes legalizing the use of gold and silver as a competing currency to the dollar as an initial, practical measure to address the problem.

"If anyone would rather continue to transact in a depreciating dollar, he would be free to do so," writes Paul. "But anyone that prefers a currency that would hold its value and won't become worthless before his eyes just because his government ran the printing press one too many times would have real options."

Today, as the dollar hits historic lows against foreign currencies and oil and other commodities reach record highs, talk of bubbles and inflation is again at the center of debate over the Fed's role in the economy.