The Gold Standard Guide

Pure gold bars stacked.

Throughout history, gold has been used as money because of its durability, divisibility, malleability and rarity.  In fact, the United States had a gold standard until 1971, when President Richard Nixon removed gold’s link to the dollar due to a diminishing supply of gold, given that other countries were trying to convert their dollars to gold.

The main problem with unbacked paper currency, also known as fiat currency, is that governments tend to get careless with their spending, thus requiring increasing amounts of paper money to pay off the debts.  As nations are flooded with paper currencies, the currencies lose value.

Eventually, due to soaring global debt levels that cannot be repaid and loss of confidence in paper currencies, gold is likely to play a central role in the global monetary system due to sheer necessity.  The loss of faith in paper currencies will require a shift toward a more stable, universally accepted form of money that cannot be recklessly printed at whim.

Danish 20 Kroner gold coins.
Danish 20 Kroner gold coins, featuring reverse and obverse

The Benefits of a Gold Standard

A gold standard would bring greater stability of consumer prices, preventing the frequent cycles of booms and busts that currently plague the economy.  A gold standard would also likely raise interest rates, encouraging people to save money and make more productive investments.  Additionally, because paper money would be backed by a finite resource, a government issuing such currency would be forced to be more fiscally responsible.  This greater fiscal discipline would bode well for future generations who wouldn’t have to worry about carrying massive debt burdens.

For the U.S. Treasury and Federal Reserve, the central bank of the U.S., a gold standard would bring greater prestige to the dollar, with holders confident that they can convert them into a tangible asset with intrinsic value.

Will There Be Hyperinflation?

Some Austrian economists and media pundits have been claiming for years that money printing, especially in the form of quantitative easing, or QE, would lead to hyperinflation in America.  So far, these predictions have failed to materialize.  Among the reasons for this is that the U.S. dollar is considered a safe haven currency due to its status as a global reserve currency as well as its backing by the most powerful military in the world.  Because the U.S. has the largest economy among western nations, and due to the perceived stability and depth of its markets, foreigners tend to buy dollars during times of global economic unease.  Foreign purchasers thus help prop up the value of the dollar despite massive money printing by the Federal Reserve.  Besides which, a large portion of these printed dollars reside in bank balance sheets and do not enter the Main Street economy, contributing to deflation.  As well, aging populations in industrialized nations and credit markets that can no longer be expanded contribute to deflation.  All of these forces put together have counteracted central bank money printing and thus prevented the hyperinflation that some have predicted.  Eventually, hyperinflation may occur, which would require a loss of confidence in the dollar, though most economists at the moment do not foresee its occurrence.

Though hyperinflation or mass inflation has not occurred in the general economy, it has manifested itself in pockets of the economy, especially in real estate, education and health care.  These asset bubbles in pockets of the economy carry very real consequences for most people, as they prevent them from attaining a high standard of living.  Either they must do without these goods or services or pay a very high price for them, leaving them with less disposable income.

Is There Enough Gold for a Gold Standard?

The question isn’t if there’s enough gold for a gold standard but rather at what dollar amount should gold be priced given the government’s holdings of gold as well as the amount of dollars in existence.  Other factors to take into account are whether there would be a complete or partial backing of the currency.  Generally, it is believed by proponents that a partial backing of gold would require a valuation of at least $4,000 per troy ounce.