Return to gold standard seems less unthinkable

August 15, 2011

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.


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Here is the meme I’d like help spreading.

I am a Republican and an ardent Paul supporter. We represent a large plurality of the party. Our views are being discounted and our candidate marginalized. I know GOP Leadership can affect this problem and get Ron Paul the TV time his second place at Ames and wins elsewhere have earned him. Therefore, if this problem is not corrected by GOP Leadership and Ron Paul does not receive the nomination, I will vote a straight Democrat ticket right down to dog catcher. I can and will make you lose every seat in the House, the Senate, the State Senates, Governorships, and every single other elected position right down to dog catcher. If you correct the problem and Ron Paul is STILL not nominated, you can count on my support as usual.

Posted by lnardozi | Report as abusive

If a gold standard based on the Euro cannot work for 17 culturally and economically related countries, how can a gold standard based on metal work for the 193 culturally and economically disparate members of the UN? What mysterious joojoo does metal possess that Euros don’t? Why bother to re-run an experiment to which you have had a grandstand seat for the past decade?

Posted by IanKemmish | Report as abusive

The quality of your posts is somewhere between deathly conservative, and message reporting directly from the hapsburg empire. You’re 30 years out of date, and taking the gold standard seriously wasn’t worth my time.

anyway, if google can use phone based monetary systems, and its single algorithm generates all its money when people search to find things out, both these concepts of money are generated yes that’s right OUT OF THIN AIR. They do not need to dig it out of the ground and value it because of its pretty color. Money has nothing to do with mineral/commodity wealth, especially in the 21st century, but thanks again for encouraging the antiquated conservatives in my country to agree with you, and vote for people who screw up the global financial system… LONG LIVE GOLD!

Posted by theinfamoush6 | Report as abusive

“Bernanke was appointed Fed chair to inflate out of this mess, he’s implementing the plan he outlined in his 11/21/2002 speech “deflation making sure it doesn’t happen here”. Debt is fixed in the US up to 30 years, if they continue to devalue the dollar the value of debt in constant dollar goes down, debt is reduced, the cost of goods and services goes up generating more tax revenue, inflation = less debt more revenue, deflation = more debt less revenue. If you ran any business which would you choose? Why would the same entities that are benefiting from inflation consider ruining the game by returning to the gold standard? Given the current environment a more like scenario would be Executive Order 6102 which required ALL U.S. citizens to deliver THIER GOLD to the U.S. Government on or before May 1, 1933.

Posted by PeterCatranis | Report as abusive

When all else has failed and the times have changed, why not? Someone please give an even-tempered argument against this. Fitch is right. S&P is wrong. Now let’s prove what we believe.

Posted by pHenry | Report as abusive