Return to gold standard seems less unthinkable
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Fiat money has worked well since Richard Nixon ended the dollar’s peg to gold 40 years ago to the day, but this latest recession must gnaw at believers. If years of ultra-cheap cash give rise to serious inflation or an accelerated retreat of the U.S. currency, the gold standard, however erratic and deflationary, may start to appeal again.
The arrangement born at Bretton Woods and used for nearly three decades was not a true gold standard, as it was entirely inter-governmental and the private holding of gold was illegal in the United States. It thus lacked the virtue of independence from political meddling, failed to provide anti-inflationary benefits and collapsed once its U.S. sponsors no longer controlled the world economy.
The true gold standard, in which gold coins circulated freely as legal tender, was implemented by Isaac Newton as the UK’s Master of the Mint in 1717 and lasted for just under 200 years, interrupted only during the Napoleonic wars.
Compared to an ideal, stable and non-inflationary monetary system, free from influence by elected officials, the gold standard has two flaws. The metal’s supply is erratic. It can soar unexpectedly with new discoveries, thus causing currency values to fluctuate. Conversely, new deposits tend to be found slowly, making a gold standard excessively deflationary when population growth is rapid. That is what contributed to the standard’s breakdown after 1900, and helped prevent its revival in the 1920s as birth rates accelerated.
World population growth is now declining after its annual peak of 2.2 percent in the early 1960s. By 2030, it is forecast to fall below the 0.72 percent rate of 1900. That would make a gold standard practicable and not too deflationary.
That doesn’t make it any more likely that central bankers would embrace it, despite advocacy from quantitative easing and Federal Reserve critics like Steve Forbes and Ron Paul. For one thing, it would dramatically undercut their influence.
But more chips at the dollar’s credibility, further downgrades of Uncle Sam’s credit or other harmful results from years of ultra-low interest rates could bring more people around to the idea of a new reserve currency. A return to the gold standard remains unlikely, but it’s no longer unthinkable.