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Would Returning to the Gold Standard Be a Bad Idea?

Illustration of the Gold Standard. Image: CoinWeek.
Illustration of the Gold Standard. Image: CoinWeek / Adobe Stock.

By CoinWeek …..
Most coin collectors know about the gold standard, and many American collectors are aware of the bimetallic system under which the United States operated when Congress wrote the Mint Act of 1792, which established the United States Mint and gave name to the coins that would serve as our money.

The push away from silver to a gold standard began to take root in the early 19th century. Thirty years after the U.S. Mint was established, the United Kingdom adopted a gold standard. It was then widely adopted by other countries in Europe, as well.

The gold standard was a monetary system wherein each unit of currency had a fixed value in terms of gold. This means that the government would guarantee to convert its paper money (“fiat” money) into a specific amount of gold (“specie”) upon request. The adoption of a gold standard in the United States was a contentious issue dominating American politics in the late 19th century, after the U.S. adopted a de facto standard in 1879. A formal gold standard was later adopted in 1900.

Within a decade, the system was already creaking. World War I put massive pressure on the system, but the Great Depression ended it.

One major issue with the gold standard is its rigidity. The value of a country’s currency is tied to the amount of gold it holds, meaning that there is little room for flexibility in times of economic instability. This became apparent during the Great Depression in the 1930s when countries on the gold standard were forced to raise interest rates and cut government spending in order to maintain their gold reserves. This only worsened the economic downturn, leading to widespread unemployment and poverty.

In 1931, the U.K. abandoned the gold standard, and by 1933, the Roosevelt Administration had seen enough. On April 5, 1933, President Franklin D. Roosevelt issued Executive Order 6102, which called for a nationwide recall of gold and made it unlawful for Americans to privately own gold bullion. The 1944 Bretton Woods agreement essentially pegged currencies around the world to the U.S. dollar and pegged the U.S. dollar to gold at a fixed price. In 1971, the Nixon Administration put an end to the Bretton Woods system and made the dollar a completely fiat currency.

Lobbying for the Return of a Hard Money Standard

Calls for a return to a gold or “sound money” standard as a solution to economic instability and inflation are not new, especially now that the national debt has reached absurdly un-repayable levels. Proponents of the idea argue that tying currency to gold would bring stability and trust back into the financial system. They claim that it would prevent governments from excessively printing money and artificially inflating their economies.

However, economists have warned that returning to the gold standard would be a bad idea.

One of its major flaws is that it limits the government’s ability to respond to economic crises. In times of recession or depression, governments would not be able to increase the money supply to stimulate the economy as they would be constrained by the amount of gold reserves they have. This could lead to prolonged economic downturns and hinder growth.

Moreover, a fixed exchange rate between gold and currency can also be problematic. As the value of gold fluctuates, it would cause instability in international trade and make it difficult for countries to maintain their balance of payments. This was evident during the Great Depression when many countries abandoned the gold standard in order to devalue their currency and boost exports. This would also prove to be a major problem for countries with global trade deficits – a fact that was also true during the mercantile era.

Another issue with the gold standard is its vulnerability to speculation. If a country’s currency is tied to gold, then it can be subject to speculative attacks by traders betting against its value. This can cause severe damage to the economy and lead to financial crises.

In conclusion, while the gold standard may sound appealing in theory, returning to it would not be a wise decision. It would limit the government’s ability to manage the economy, create instability in international trade, stifle growth, and make countries vulnerable to speculation.

That’s not to say there’s no merit in institutional or especially private holdings of precious metal bullion coins. These products have shown over the decades to have a legitimate purpose and market demand. But monster boxes of bullion coins do not an economy make. Besides, the immediate future of money is likely not silver and gold discs, or paper notes, but an encrypted string of ones and zeros.

Coinweek is the top independent online media source for rare coin and currency news, with analysis and information contributed by leading experts across the numismatic spectrum.

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  1. “It was then widely adopted by other countries in Europe, as well.”
    Which countries? Was that before they joined the Latin Monetary Union?

  2. In order to work as a currency, gold cannot be denominated in fiat, it must be denominated in weight and it’s value must be free to float.

    As for the problem of not enough physical gold to go around, the lamimated plastic goldback notes denominated in weight only, would serve perfectly. Small amounts of gold are thus available in a range of weights to suit any need.


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