"We have gold because we cannot trust governments," President Hoover famously said in his statement to Franklin D. Roosevelt in 1933.
President Trump has made numerous statements in the past about reverting to the ‘Gold Standard’. But what exactly is the gold standard? And would it really be practical to rebuild an international gold standard?
What is the Gold Standard?
The gold standard is a monetary system where a country’s unit of currency is kept at the value of a fixed amount of gold. Countries that use the gold standard set a fixed gold price which is then used to determine the value of the currency. For example, if the UK set the gold price at £900 an ounce, the value of the pound would be 1/900th of an ounce of gold.
The History of the Gold Standard
The allure of gold is nothing new. Throughout history, gold has often been the currency of choice, and the attraction remains strong today. After the Gold Rush in America, worldwide commerce was becoming more unified and countries were looking to create a ‘world market’, and the gold standard was put into operation.
This meant that citizens no longer had to carry around gold bullion and coins, and could handle transactions with the corresponding value in paper money.
In the UK, the gold standard was put into place in 1821. This then meant that the Bank of England was obligated to exchange gold for pounds at the specified rate. Other countries then followed suit.
US Congress then created the Federal Reserve in 1913, to help stabilise currency values, but then WW1 threw a spanner in the works – to pay for the conflict, countries began printing money in large quantities which soon led to hyperinflation. The 1929 stock market crash meant that the price of gold rose massively, and so people began hoarding the precious metal.
Flaws in the gold standard showing an inability to hold during good and bad times, and a lack of confidence in the system meant that it ended in the UK in 1931, and the USA soon followed in 1933.
Should the Gold Standard be Restored?
During times of instability, it is common to hear talk of implementing another gold standard. There are pros and cons, as there are with most economic issues.
One opinion is that it may be helpful for national debt and inflation, as the gold standard limits the power of governments and banks to cause inflation by excessively issuing paper currency. It also provides a fixed pattern of exchange rates, which creates certainty in international trade.
The disadvantages would be that the gold standard may not have the ability to hold steady during hard times, as seen after the outbreak of WWI. It also may mean that the countries involved may not be able to isolate its economy from the rest of the world and would be latched to those with inflation or depression. If a global gold standard was implemented, a sudden spike in the demand for gold would also impose large costs on the global economy.
It’s common for people to think about resurrecting old ideas and using them as new solutions for current problems. Moving to a gold standard is most certainly possible, yet it would take a lot for the world to implement this move. With so much happening in the world right now, it’s hard to imagine that this would be a priority. But whatever happens – it’s clear that our old friend gold has never lost its appeal, and in times of trouble investors return to gold as a safe-haven.
But who knows what the future holds?
This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.