Steve Forbes Pushes Modern Gold Standard

NEW YORK (TheStreet ) -- Before you scoff at the idea of a gold standard, Steve Forbes says to take another look.

A "true" gold standard where every U.S. dollar in circulation is backed by gold is literally impossible. The amount of money in circulation is almost $9 trillion. That's counting cash, deposits, traveler's checks, savings and money-market deposits. The amount of gold the United States holds, using a $1,500 per ounce gold price, is $400 billion. So a true gold standard would require the gold price to hit $5,000 and for the government to remove $8 trillion in paper currency from circulation. That or we buy all the bullion in the world -- 82,500 tons which would still only equal $4 trillion -- and cut our money supply in half.

Forbes acknowledges that this way of operating isn't realistic and proposes a different kind of gold standard. He proposes to set the U.S. dollar to a fixed rate in gold, say $1,500, when the price rises above that level the Federal Reserve must raise rates and when it falls below the Fed can loosen monetary policy. Gold, in essence, would act as a check for the central bank and help regulate the U.S. dollar.

"We don't need to own one ounce of gold," says Forbes in an exclusive interview with TheStreet, "you just keep it in a narrow range. Forbes calls this gold standard modern. "I think this is the realistic one for the world to have today."

The typical gold standard takes a lot of heat with critics who cry that it would potentially lead the United States into a catastrophic recession as the Fed would lose all its monetary power. "Once you remove the central bank's ability to shape monetary policy by basically tying it to gold and only to gold, you've got a problem," argues Jon Nadler, senior analyst at Kitco.com, who thinks an economic contraction would result from a gold standard and also questions its past successes.

The United States has been on a gold standard several times with the most recent being the Bretton Woods system between 1945-1971. During that time there were limited banking crises as world currencies were linked to the dollar, which was linked to gold, but then the U.S. economy faltered during the Vietnam War. The United States didn't have enough money to pay for the war and President Nixon dissolved the gold standard in 1971 in favor of floating currency rates and the possibility of creating more cash.