Will the Gold Standard Return?
The first question you may be asking is, just what is the gold standard? Historically, the gold standard is a system where a country’s currency, i.e., pounds or dollars, is based on a fixed amount of gold. There are many examples of this throughout history; This article will examine both the gold standard used during the 19th and 20th centuries and why the Gold Standard is no longer in use.
The British parliament passed the Bank Charter Act in 1844. This legislation established that gold would back notes issued by the Bank of England, creating a gold standard. It meant that a standard amount of gold would be kept in the treasury for every pound that the treasury issued. Great Britain maintained the gold standard until 1931, when they abruptly abandoned it without consultation with the other global powers.
The United States formally adopted a gold standard with the 1834 passage of the Gold Standard Act. This act made U.S. currency redeemable for gold, fixing the price of gold at $20.67 per ounce. There were several critical developments throughout the lifespan of the American gold standard.
- The stock market crash of 1928: see below for more details.
- The nationalization of gold ownership in January 1934 made all gold coins, bars and certificates the property of the U.S. Treasury. Under nationalization, U.S. citizens were obliged to turn over all gold holdings to the government.
- The Bretton Woods agreement in 1944. At the time, the U.S. controlled two-thirds of the world’s gold and this agreement pegged Global currencies to the U.S. dollar. This pegging remained in effect Until August 15, 1971, when the U.S. forbid the redemption of dollars for gold.
- Post-August 15, 1971, the U.S. dollar and most other currencies became free-floating, and with the end of the gold standard, U.S. citizens could once again own gold.
This effectively ended the gold standard. Gold no longer had a fixed trading price and gradually started to appreciate in value.
Why the Gold Standard Will Not Return
One of the immediate side effects of the 1929 stock market crash was a run on American banks. In short order, hundreds of thousands of people withdrew their bank deposits and, afraid to hold cash, began to exchange their banknotes for gold. In turn, this made the U.S. government fearful of depleting its gold supply. The run on banks served to deepen and extend the great depression.
As the global economy began to slow down to a trickle of its former self, Great Britain abandoned the gold standard in 1931. Under a gold standard, every currency unit is supported or backed by a fixed amount of gold, making it difficult to adjust its value. Once a currency becomes untethered from gold in the central bank vaults, a government has more levers available to pull during tumultuous times.
A prime example of those levers would be creating stimulus packages and temporarily increasing the money supply. The British government was able to take advantage of these tools, which influenced a shorter economic depression than that in the United States.
Unable to create financial stimulus packages directly, the U.S. suffered from economic recession into the start of WWII. The U.S. economy didn’t fully recover until they could turn their vast manufacturing abilities to assist the allied war effort.
The financial crisis of 2008-2009 demanded the distribution of large stimulus packages to help keep large segments of the economy moving. Even more significant stimulus has been released into the economy during the Covid-19 pandemic. Arguably, both of these events would have done far more damage to the global economy if the gold standard was still operational.
Closing Arguments and Final Thoughts
If a national monetary system uses a gold standard, the money supply is fixed to either a set amount or a new amount based on whether gold is added or removed from the federal coffers.
Another argument against the gold standard is how the global economies have grown since 1971. Arguably, the growth of equity markets and new technologies such as mobile and internet companies could lead one to think that there isn’t enough physical gold in the world to reflect the real growth in value over the past 50 years.
There is very little political enthusiasm to return to a system that ties governmental hands in times of global or economic turmoil. Equally, the political will to turn off the economic golden goose that has brought wealth to so many is antithetical to any sane reelection plans. To conclude, global financial systems are much more sophisticated and diverse than just a few short years ago.
In 2010 nobody had ever heard of crypto-currency. Today crypto-currencies have a market cap of $1.74 trillion. The market cap for all gold on the planet is estimated to be $11.881 trillion. With this in mind, it is easy to establish that a gold standard would not absorb the newly created forms of wealth in today’s world.
Gold and precious metals are still seen as vital commodities to hedge against inflation as they have many manufacturing uses and cultural importance for different people around the planet. Historically, the gold standard helped establish trust in the burgeoning global financial system as it developed into its present day. Nevertheless, the time of gold as foundational to a national money supply has most likely run its course.