Could There Be a Return to the Gold Standard?
In recent years, there has been seemingly more and more debate about the feasibility of returning to the gold standard. As concerns over the U.S. dollar mount, there may be further talk of such ideas, although whether or not they make sense and could be actually implemented is highly debatable.
To understand the implications of such a move, one must have an understanding of how the gold standard works. We will briefly outline the gold standard monetary system, and then discuss some of the potential pros and cons of such a system in today’s world, as well as some of the potential challenges that could be faced trying to implement such a system.
The Gold Standard in a nutshell…
The gold standard is a financial system in which each unit of currency is directly tied to an asset-in this case that asset is gold. Use of gold as money began thousands of years ago, and even to this day the commodity is recognized as money.
Under a gold standard monetary system, every single unit of currency would be backed by a specified amount of gold bullion. This accomplishes several things. Here are a few of the potential advantages of a gold standard system:
- Under a gold standard system, price stability can be achieved and maintained. Because the government can only increase the money supply with a corresponding increase in gold holdings, any significant inflationary pressures are not likely to be seen, and any hyperinflation is essentially impossible. The overall lack of currency manipulation can keep prices stable while maintaining stable currency values.
- The gold standard can help promote international trade. This monetary system can encourage international trade because participating countries operate on fixed exchange rates.
- The gold standard can help prevent financial repression. This term refers to the transfer of wealth from creditors to debtors. This can be used to reduce debt, and is also considered to be a form of taxation. Having a gold-backed currency can prevent deficit spending and thus keep wealth with the people rather than with the government. Gold acts as a barrier to such practices, and given this fact it’s no wonder that many proponents of big government are opposed to such a system.
- A gold standard keeps the government, its people and its leaders accountable.
While a return to the gold standard could have many potential benefits, it could also have some serious drawbacks. Some of the potential arguments against such a system include:
- The gold standard can act as a barrier to economic growth. Once an economy has reached its productive capacity, it cannot grow further without a corresponding increase in its money supply. If a nation’s currency is directly tied to the amount of gold held by that nation, then limits on the gold supply could limit economic growth potential and severely hamper a country’s ability for economic expansion.
- The gold standard can bring a degree of volatility to prices in the short-term.
- Countries that produce gold may have a distinct advantage over non-producing countries.
- Central banks would not have the ability to manipulate the money supply in order to fight economic contraction.
- Because the money supply is based on gold production, inflation could be caused if gold production outpaces economic expansion. On the other hand, if economic growth outpaces the production of gold, then growth is constrained and could lead to deflation.
- The devaluation of fiat currencies under a gold standard could be sharp and severe.
- The gold standard limits a central bank’s capabilities when it comes to regulating inflation and deflation as well as dealing with economic crises.
While these pros and cons are only based on some of the arguments for and against a gold standard system, they provide a great degree of color on what implementation of such a system could entail.
Implementation of such a system in the modern era could prove to be extremely difficult. In order to move to such a system, the U.S., for example, would have to acquire enough gold bullion to back every single dollar currently in circulation. At the present time, that’s nearly $3 trillion dollars’ worth of gold.
The current gold reserves of the U.S. stand at approximately 260 million ounces, worth about $431 billion. The country would, therefore, have to go out to the open market and buy enough old to cover its liabilities; unfortunately, buying that much gold would only serve to further inflate the price of gold, making the transition even more expensive.
The other option would be to inflate the price of gold in dollars high enough to cover the current monetary base. If the gold price were to be inflated from current levels to $10,000 per ounce, it could have a significant negative impact on the economy, an impact that may be severe enough to fully wipe out the potential benefits of such a system.
While the arguments for a return to the gold standard will likely be ongoing, and anything is possible, given the difficulties associated with implementing such a system it is unlikely that a return to the gold standard will be seen any time in the near future.