The Gold Standard

At the present time, all countries on the earth are using some form of fiat currency as their nation’s money. This has not always been the case, as gold and silver had historically been used to back currencies of ancient Rome and Greece.  But after World War II, the agreement reached at Bretton Woods would make the US dollar the world’s reserve currency – the dollar would be based on gold, but all other nations would base their own currencies on the dollar.  But in 1971, America decided to break the dollar’s tie to gold, leaving all world currencies completely naked with only the governments’ writ of fiat declaring its value.

Now, however, people all over the world are starting to question whether or not this is such a good system.  Governments are spending too much and are increasing their deficits at an ever increasing rate.  Debt is out of control and to repay it, governments are simply printing more money.  But money creation such as this is inflationary in the extreme. Therefore, having some kind of gold standard in place would limit a government’s ability to print money and spend so easily.

The following are some discussions on this topic.

April 30, 2012

In this USNews article by James Rickards, author of Currency Wars, the views taken by Ben Bernanke regarding gold’s use as a backing for currency are challenged.  Rickards explains how the Fed chairman regularly uses two primary arguments against a gold standard:

  1. There isn’t enough gold available to back the currency
  2. The gold standard is at least partly to blame for the Great Depression of the 1920’s

Both of these arguments, however, are false and the result of an incomplete understanding of the facts. It’s a matter of price in both cases. In the first instance, there indeed would not be enough gold at current prices, given the mass money printing that has happened all over the world. But at a price of $10,000/ounce, this would be closer to a realistic backing for the paper supply. Furthermore, while it is true that the Great Depression occurred during a time when the US was on a gold standard, the deflationary environment was the result of setting the price of gold too low. Back then, if the price had been set at an amount closer to $50/ounce instead of $20, the US might have limited, or even avoided the depression altogether.

Here’s Jim Rickards giving some historical examples of countries going back to a gold standard – both successfully and unsuccessfully, depending on their choice of setting the gold price to match their paper money in circulation.

The concept of the gold standard was also discussed on Bloomberg’s Reganomix segment and some interesting points were raised in honest debate between Rob McEwen, founder and former CEO of GoldCorp, and Michael Crofton, CEO of Philadelphia Trust.

April 11, 2012

Here’s an interesting MSNBC interview with Matt Bishop, author of a new ebook entitled In Gold We Trust?, where the gold standard – having a sound currency based on gold – is discussed:

A gold standard – making the dollar convertible into gold again – would serve as a measure of control. No one would have the ability to artificially inflate the currency system simply by printing because there would have to be a certain amount of gold backing up each representation of paper or electronic dollars in circulation. It would reduce politics and enforce responsible spending – a much needed thing for America today.

 

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