LAWRIE WILLIAMS: Could the U.S. or any other country go back to a gold standard
We hear from time to time some economist or politician suggesting that his/her country introduce a gold backing for their country’s currency to stabilise it, although there are few countries where this would have much, if any, global impact. But one country where this would have a huge effect, and where the idea is raised from time to time, before usually being written off as totally impractical, is the U.S. – the last country which did in fact have an effective currency tie to gold until President Nixon closed the so-called gold window back in 1971.
The subject of the U.S. re-introducing a Gold Standard has yet again come to the fore with U.S. Representative Alex Mooney proposing on October 9th to repeg the dollar to gold with the Gold Standard Restoration Act – HR 9157. The proposed Act notes among other things that: The U.S. dollar has lost more than 30 percent of its purchasing power since 2000, and 97 percent of its purchasing power since the passage of the Federal Reserve Act in 1913....The American economy needs a stable dollar, fixed exchange rates, and money supply controlled by the market not the government … The Gold Standard would put control of the money supply with the market instead of the Federal Reserve, discourage excessive deficit spending, and encourages the balancing of Federal budgets, inter alia.
As with any such proposal there are a huge number of pros and cons revolving around pricing and implementation, many of which would most likely make the whole idea totally unrealistic. As presented the Act would involve the U.S. Treasury Secretary defining the value of the dollar in terms of a fixed weight of gold at the closing price of gold on a specific day within 30 months after the date of the Act’s enactment. It would have to make Federal Reserve notes redeemable for and exchangeable with gold at this fixed price and create mechanisms that facilitate such redemptions and exchanges between banks and the public.
Adhering to the restrictions implicit in the implementation of a true gold standard would be virtually impossible in this day and age of deficit financing and government debt, while the pricing of gold implicit in the Act would be the straw that breaks the camel’s back. As implied in the Mooney proposals letting the markets set the fixed price could be suicidal and lead to an enormous run on the nation’s gold holdings which would, in our opinion at least, lead to their complete decline. However, if that particular suggestion were to be ignored and the gold price set high enough to dissuade withdrawals, this would be totally unacceptable to the large proportion of the nations of the world which hold little or no gold in their reserves.
The overall arguments revolve around which is perceived as a better route to follow: the fiat currency one as at present where the potential for printing more and more dollars to finance economic profligacy can be seen as unlimited, or the far more restrictive economic controls under a gold standard system. Both have their adherents, although the fiat currency system is winning out for the time being and it is hard to see any return to an alternative.
Proponents of the Gold Standard will point to statistics suggesting that U.S. annual growth was higher when it was in place, average incomes grew faster, national debt was far lower and managed better with trade deficits being far better controlled. Defence spending would also have been far better kept in check preventing some U.S. global military involvements – although whether this should be considered a pro or con probably depends on one’s political leanings.
On the other side of the coin it is felt that gold price volatility can not provide the kind of performance necessary to maintain economic stability. It would limit the ability of the Government or the Federal Reserve to help the economy out of recessions and depressions, and to address unemployment should such problems arise. This volatility is said to be responsible for leading to periodic deflations and recessions affecting the overall economy. In potentially restricting defence spending it could adversely impact the country’s security and ability to defend itself.
Currently it seems that the majority of prominent economists are strongly, and vocally, against any return to a Gold Standard. Indeed the Britannica ProCon.org website quotes Anil K. Kashyap, PhD, Professor of Economics and Finance at the University of Chicago, as stating, “Love of the Gold Standard implies macroeconomic illiteracy.”
Thus it seems that the latest submission to U.S. Congress regarding a return to a Gold Standard is, like its predecessors, doomed to failure. Any such proposal is also unlikely to find any traction elsewhere in the world, although the introduction of a gold standard in any other country other than China would probably have little global relevance.