Reconsidering the Gold Standard

Posted on June 13, 2022

By Paul Vanguard, for BullionMax.com Last week, we learned that our dollars buy 8.6% less, on average, than they did one year ago. According to the Bureau of Labor Statistics:

• Prices for all items rose 8.6%
• Food (at home) went up 11.9%
• Gas is 48.7% more expensive

So as long as you don’t eat or drive, maybe you’re doing all right! Seriously, though, folks, things are not all right. The last time we saw prices rising this fast, I was running around in short pants. I didn’t have bills to pay (isn’t that what parents are for?) and I couldn’t care less about monetary policy unless it meant I got a quarter I could spend at the corner store for a bottle of Coke. My point is, a lot of us who were alive during the stagflation era weren’t adults yet. Now we are. We can’t count on our parents to make smart decisions for us. We’re watching prices soar on an almost-daily basis. What can we do?

Reconsidering the gold standard

Maybe it’s a hazard of my line of work, but I spend a lot of time thinking about the gold standard (no, not the Royal Mint’s new gold standard coin). It’s not a subject people talk about much. In fact, a friend of mine, one of the smartest guys I know (72 years old, has three master’s degrees and is a nationally-ranked Scrabble player of all things) told me: “I don’t know anything about the gold standard.” Strange, isn’t it? How could someone so smart not know such a basic fact of American history? He did say something else, a lot more enlightening:

But what I can tell you is that, when I was young, dimes and quarters were made of real silver. Till silver got too expensive. You know pennies aren’t made of real copper anymore? Because it’s too expensive too. My whole life I’ve seen everything get more expensive till, I guess soon we’ll be using rocks as money.

I told him that was nonsense, because there weren’t enough rocks in the world… He made a good point, though: If there’s no constraint on making new money, why would the government ever stop? One thing the gold standard did was constrain money creation. Here’s a very simple version of the way the gold standard worked:

1. A country legally fixed the value of its currency to a specified amount of gold. For example, from 1834-1933, the value of one ounce of gold was $20.67 U.S. dollars.
2. That country can either mint gold coins for use as money, or print currency (paper money) that’s more convenient to use for everyday transactions.
3. Any other country, anywhere in the world, that also operates on the gold standard now knows the precise exchange rate between their local currency and the U.S. dollar. For example, Britain fixed the price at £3 17s. 10½ per ounce, which gives us a mathematical exchange rate of $4.87 to £1.
4. Because exchange rates were fixed, global price levels moved together in a self-correcting way. (This is sort of complicated to explain but you can read all about it here.)

In the U.S., these paper gold certificates looked like this: I’ve highlighted some of the text, in red, for special attention. Here’s what it says:

This certifies that there have been deposited in the treasury of the United States of America One Hundred Dollars In gold coins payable to the bearer on demand

Pretty simple, right?  The U.S. treasury has $1 billion in gold, so the Treasury Department can either print $1 billion in dollars or (even better) just mint $1 billion in gold coins. Either are used as money. And here’s the thing: it worked. For centuries!

Was there inflation under the gold standard?

Economist Michael D. Bordo tells us:

Between 1880 and 1914, the period when the United States was on the “classical gold standard,” inflation averaged only 0.1 percent per year.

So, technically the answer is yes. But not really. There were devaluations, though – for example, in 1933, President Roosevelt changed the legal price of gold from $20.67/oz to $35/oz. (where it stayed until 1971). Suddenly, dollars lost something like 75% of their purchasing power. So the gold standard doesn’t prevent the government from messing with the money supply – however, it does force them to do so in an above-board way.

What went wrong with the gold standard?

World War I – when the gold ran out, the major powers all resorted to money-printing to pay for the artillery and rifles they needed to keep fighting. That was the first major blow. In the aftermath of World War 2, pretty much every major economy in the world was a wreck – except the U.S. So the U.S. allowed other nations to cash in their central bank dollar holdings for gold at the $35/oz rate, even though American citizens hadn’t been allowed to do this since 1933. This led to a steady decline in U.S. gold reserves, as other nations gradually swapped their dollars for gold – and ultimately, in 1971, President Nixon canceled forever the fixed-exchange rate between dollars and gold. (The rest of the world was pretty angry about that.)

Will we ever go back to the gold standard?

Let’s see… if the U.S. today, right now, adopted the gold standard, we’d need to back every dollar in existence with the gold in the Federal Reserve. My back-of-the-envelope calculations for that: But don’t start salivating, goldbugs! In order for the U.S. to return to a gold standard, central bankers at the Federal Reserve would have to give up their power to arbitrarily create new money out of thin air. Essentially, the government would have to surrender a great deal of economic influence. Robert Michels’s Iron Law of Oligarchysays those who have power will use all means necessary to preserve their power. In other words, don’t expect governments to just decide one day to adopt a rational, meaningful monetary policy – it would mean giving up too much authority and control. Individual American citizens, though, can take steps toward putting themselves on their own, personal gold standard. Heck, that’s what the Goldback gold note is all about! And that’s just one of the many, many types of gold available to those of us who want to take back control of our own money. I’ve said it before, and I’ll say it again: Gold is the ONLY unprintable, unhackable store of value that’s proven the test of time.   Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.