The Gold Standard: Would a Return to The Gold Standard Make Any Difference?

by JDH on August 15, 2011

Forty years ago today, on August 15, 1971, President Richard Nixon killed the gold standard. More specifically he ended the international Bretton Woods monetary management system, which since the end of World War II had fixed the American dollar to gold. (It was more complicated than that, but that was the gist of it).

In simple terms, the “gold standard” allows for the holder of a piece of paper (such as a U.S. dollar) the ability to convert that dollar into a fixed amount of gold. Under the terms of the Bretton Woods agreement (named for the town in New Hampshire where the meetings to design the system were held in 1944) the United States agreed to redeem dollars for bullion at the rate of $35 per ounce of gold, making one U.S. dollar worth 1/35th of an ounce of gold.

(Convertibility only applied to central banks of other countries, but again, that’s the gist of it).

Of course today a U.S. dollar is worth less than 1/1,700th of an ounce of gold.

So why did Bretton Woods die on August 15, 1971? Simply put, the U.S. cranked up the printing presses in the 1960’s to pay for social programs and increased military spending (including the Vietnam War), which lead to a trade deficit. It simply became impossible for the U.S. to redeem dollars for gold, if they didn’t have the gold.

And that, my friends, is the point of the gold standard.

The point of the gold standard

Politicians want to get re-elected, and the easiest way to get re-elected is to promise to spend money. Politicians tend to have big egos, which presumably accounts for their desire for world domination (which I assume explains why the U.S. is militarily active in dozens of countries). Of course if politicians said “we will spend on new programs, but to pay for them we will either have to cut existing programs, or raise taxes”, no-one would vote for them. We want something for nothing. We want the other guy to pay for it.

The gold standard becomes a huge burden on spend-thrift politicians. If in order to print a new dollar they actually have to purchase a corresponding amount of gold, it becomes very difficult to print dollars at will. In fact, it’s impossible.

Of course gold in and of itself isn’t magic. We could just as easily have a standard based on silver, or lumber, or seashells, or anything else that can’t simply be created out of thin air. Gold, however, happens to be convenient, because it is in relatively short supply, and doesn’t degrade over time (like lumber) and is easily measured and verified (unlike seashells, for which there is no uniform standard).

Should we return to the gold standard?

That’s a difficult question.

Obviously limiting the ability of politicians to print money like crazy is a good thing, so on that basis alone, yes, returning to the gold standard would be a good idea.

However, there are two arguments against a return to the gold standard.

First, how would we do it? At what price would you value gold? With massive government deficits, it may be necessary to value gold at $10,000 or higher per ounce, for there to be enough gold to back the massive number of U.S. dollars in circulation. (I just made that $10,000 number up; I assume it’s probably much higher). A jump in the price of gold from $1,700 to $10,000 would be a huge shock to the financial system. There would be some huge winners (ie. anyone who owns gold), but there would be losers as well (like the government needing to purchase gold). Government’s lust for gold may lead to expropriation, as has happened in the past.

Second, would the gold standard actually help anything? Would it actually prevent politician’s from spending recklessly?

It may slow them down, but how do you stop an egomaniac?

I’ve trashed the U.S. government repeatedly already, but the Canadian government is only marginally better. Our current Prime Minister, Stephen Harper, campaigned on a “smaller government” platform, and yet has set records for government spending, and deficits. He campaigned to reform our un-elected Senate, and yet his first act as Prime Minister was to appoint a friendly, un-elected face to the Senate, and then make that person a cabinet minister.

Why? Because that’s what politicians do.

And that’s why I fear that even with a return to the gold standard, politicians would find a way to muck it up.

Ultimately, gold standard or not, the only true solution is a permanent reduction in government spending, so that we can have an end to massive spending.

Sadly, I fear that the last forty years of dollar devaluation are only the prelude to what will transpire as the slow motion train wreck gains steam.

Which is why, incidentally, I own gold, and why physical gold and silver remains the ultimate insurance policy against out of control politicians.

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