What is it? Should, could and will it come back?

Until a few years ago, not much was heard anymore about the gold standard. That has changed and we’ll probably be hearing much more about it in the near future.

What is the GOLD Standard

The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. The US successfully operated under the gold standard from the time of George Washington to the early 1970s. Roosevelt suspended the gold standard in 1933 during the financial crisis and Nixon abolished it 1971, with the out-of-control spiraling cost for the Vietnam war being one of the reasons. Most of the world's economies have abandoned the gold standard since the 1930s and now have free-floating fiat currency regimes. So, with the gold standard, the price of gold determines the value of your currency, without the gold standard, the government determines the value of the currency.

Should we go back to the Gold Standard

Fiat currencies have a history of failing all around the world, and since it has become more and more apparent that the US dollar could eventually go the same path, the easy answer would be yes. But it’s not as simple as some professional YouTubers and campaigning politicians make it sound like. The advantages of the Gold Standard are undisputable. It would have prevented many economic disasters, including our present woes. It would have spared us the calamity of the 2008, 2009 financial crisis, the suppression of interest rates and the binge of money printing before and during the pandemic. With the gold standard, inflation is rare and hyperinflation doesn't happen because the money supply can only grow if the supply of gold reserves increases. Similarly, the gold standard can provide fixed international rates between countries that participate and can also reduce the uncertainty in international trade. But there are also some arguments against the gold standard.

According to some economists, it may prevent the mitigation of economic recessions, because it hinders the ability of a government to increase its money supply—a tool many central banks use to help boost economic growth. It also impairs governments in reacting quickly in case of a military attack or helping allies in times of war. It would most likely also cause an imbalance between countries that participate in the gold standard. Gold-producing nations may be at an advantage over those that don't produce the precious metal.

Could we go back to the Gold Standard

Theoretically, absolutely. In fact, there are speculations that the BRICS countries (Brazil, Russia, India, China, South Africa) are ‘de-dollarizing’ and plan a departure from traditional fiat currencies. As mentioned, unlike fiat currencies, which derive their value from government declarations, a gold-backed currency draws its value from an underlying precious metal, like gold. This inherent link to a tangible asset provides a level of stability that fiat currencies often struggle to achieve. These countries have risen to a significant force in the global economy. Central banks within these nations, especially China, have been meticulously accumulating gold reserves, a strategic move that has not gone unnoticed. Besides the potential BRICS gold-backed currency, there are also discussions about other reserve currencies. One notable example is the International Monetary Fund’s Special Drawing Rights (SDRs), something to replace the ailing US dollar as world currency. While SDRs encompass a diversified basket of leading currencies, made up of the US dollar, the Euro, the Sterling pound, the Japanese Yen and Chinese Yuan, the BRICS proposal sets itself apart by being firmly rooted in the backing of gold—a tangible asset with historical significance.

Will we go back to the Gold Standard

Most likely not. While there are several countries interested in going back to this system, history is not on their side. Germany adopted the gold standard in 1871, influencing countries like Italy, Russia, Austria-Hungary and the Netherlands to follow. Germany went off the gold standard 1914 to finance the war, back on it in 1923 and then abandoned it for good, followed by Great Britain, Japan, Denmark, Norway, Sweden, Finland, Belgium, France, Poland, Luxembourg and others between 1931 and 1935. Canada abandoned the gold standard in 1929.

Switzerland is one of the top countries with the largest gold reserves and was also the last country to eliminate its connection to the gold standard. In 1999, the country voted to sever ties between their currency and gold. In 2014, Switzerland saw an initiative to return to the gold standard, but it was rejected by voters.

A return to the gold standard would certainly remove central banks and government’s ability to excessively print money, causing inflation and other problems, like the acceleration of the wealth gap over the last 15 years. While there's no real interest in giving up that control, a solution for this failing fiat currency system has to be found. Politicians may use to return to the gold standard as a campaigning subject, but would most likely avoid any real talks if they get into power. A common argument against the gold standard is the fore mentioned national security aspect, the inability to quickly increase the money supply in the event of war or other crises. It is also doubtful that global gold production could keep pace with economical growth, making the gold standard logistically impractical. The increasing talks about the gold standard could likely increase the price of gold, but at this point there is no country that uses the gold standard.

Falk Hampel