Could America Return to the Gold Standard?

When asking Americans which issues most concern them, the economy always ranks near the top. New economic policies find their way into statute with every new administration. Recently, some politicians have even discussed a return to the gold standard.

The idea certainly sounds appealing on the surface. Its proponents tell us that it would prevent significant inflation by stopping the government from printing unbacked currency. A world without inflation would definitely be beneficial, but the reality is far more complex than that.

While calls to return to the gold standard may make great political fodder, it’s important to understand what such a move would entail. Gold is already a great store of value, so is it necessary to tie our nation’s currency to the metal? The facts point toward “no.”

What Is the Gold Standard?

Gold has had a place in currency for thousands of years. From ancient Rome’s aureus to modern American Gold Eagles, it only makes sense that such a precious metal would find a place in currency. Some people say this history supports the gold standard, but that’s not really true.

While the yellow metal holds a significant place in history, the monetary system wasn’t typically based on it. The gold standard is a monetary system that links a nation’s currency directly to gold. However, this system was only in place internationally from 1871 to 1914.

During those years, the world mostly experienced peace and prosperity. This is one of the main arguments for returning to the gold standard. If this were to happen, the government would determine a fixed price for gold. Citizens could then exchange gold and currency at that rate.

No country’s government currently abides by this standard. Switzerland was the last country to have any remnant of this monetary system, and they shifted away from it in 1999. This has done little, however, to dissuade supporters of the system.

Arguments for the Return to the Gold Standard

With no countries still utilizing the gold standard, it may be difficult to imagine why some people still support it. After all, why would the world move away from the system if it was so beneficial? There are plenty of reasons behind this move, but proponents of the standard also make a strong case.

The following are just a few of the benefits proponents say we’d get with a return to the gold standard:

Limited Government Power

Supporters of the gold standard believe it will stop banks and the government from causing inflation. This financial policy dictates that gold supplies must be available to back any new printed currency. 

International Trade Certainty

When all advanced nations were on the gold standard, there was a fixed exchange rate between countries. Proponents of a return to the gold standard believe this would simplify and improve international trade.

Prevent Unnecessary Wars

While it may seem unrelated, supporters of the gold standard believe it will reduce unnecessary wars. Politicians like Ron Paul believe war is easy when the nation can simply print the money it needs to engage in conflict.

Many believe that tying currency back to gold will make legislators think twice before funding war.

Reduction in Trade Deficit

Bringing certainty to international trade would be great, but gold standard supporters also believe it would reduce America’s trade deficit. They believe that fiat currency allows the government to finance trade deficits.

By tying currency back to gold, the government would no longer be able to fund such deficits. Considering America’s 100-year trade surplus streak ended right around the time the gold standard disappeared, it’s hard to argue against this point.

Would Returning to the Gold Standard Accomplish This?

When considering the potential benefits of the gold standard, it’s easy to see why some still support it. Unfortunately, there’s no way to actually predict whether these benefits would occur after a shift back to gold.

This makes it far more practical to consider the history of this financial policy and why countries shifted away from it.

A Difficult History

When the international community was on the gold standard from 1871 to 1914, there were prosperous conditions across the board. Unfortunately, history has shown that the stability offered by the policy only persisted during thriving economic times.

A drive toward returning to the gold standard ignores several important lessons from history. For instance, the idea that inflation would cease certainly doesn’t hold water. New gold discoveries — including the California Gold Rush — frequently caused rapid inflation and other economic shocks.

The most significant period of deflation — the Great Depression — also occurred while we were on the gold standard. The financial policy didn’t cause the event, but it did make the collapse worse. With money tied to gold, legislators had very few options to respond.

There are other significant disadvantages of returning to the gold standard:

Even Remnants of the Policy Failed

While President Frederick Roosevelt ended the gold standard domestically in 1933, an attempt to salvage the system internationally occurred in 1944. The Bretton Woods system set an international exchange rate based on the U.S. dollar — which could be converted to gold.

Due to growing trade deficits and increasing inflation, President Nixon ended the policy in 1971. Since America could still print all the money it wanted domestically, the system didn’t get any of the full benefits of either fiat currency or returning to the gold standard.

Dependence on Other Countries

Americans love importing Chinese Gold Pandas for their bullion needs. Fortunately, this doesn’t mean the country’s citizens are dependent on China. If America ever got back on the gold standard, however, this could change.

China is the world’s top producer of gold. Russia comes in second. America only mines 6% of global gold. This means countries with larger production capacity would have a disproportionate amount of power over the U.S. financial system.

There’s Simply Not Enough Gold

When the world was thriving on the gold standard, there were less than 2 billion people on earth. We’re now closer to 8 billion. There simply isn’t enough gold to back all the currency in circulation among these people.

Sure, it’s possible to set a high price for gold that would account for current circulation. After all, an ounce of gold set to $10,000 would cover plenty of paper currency. Unfortunately, doing so would essentially defeat the entire purpose of returning to the gold standard.

A Push to Return to the Gold Standard

Many people who buy gold bars and other precious metals don’t think much about the gold standard. They recognize that bullion is simply a sound investment that hedges against poor economies. This is sound reasoning considering its ability to store value over millennia.

While the push to return to the gold standard has typically been relegated to an outspoken minority, support for the move has been increasing. In some cases, we’ve actually seen legislative actions make major strides in the process.

We can see this trend on a national and state level. Donald Trump and one of his nominees to the Federal Reserve Board both espoused support for such a shift. Meanwhile, several states have recently passed laws that recognize silver and gold as currency.

While neither of these situations constitutes a full return to the gold standard, they do serve as evidence of a growing movement. Unfortunately, there’s no real way to know what effect this would have. Many people have started to ask, though, if such a shift is entirely pointless.

Is Returning to the Gold Standard Pointless?

There are plenty of arguments on both sides regarding the gold standard. What many people have failed to ask, though, is whether such a shift would be entirely pointless. A national shift would have no effect on what other countries do, and the U.S. no longer holds economic supremacy.

Additionally, gold is impractical for everyday use. It’s difficult to break down into smaller denominations, and securing it can become very costly. That’s why much of the investing in gold that occurs today happens on paper.

Since America shifted to fiat currency, we’ve also seen many of the doom-and-gloom predictions fail to transpire. Inflation has remained relatively stable in recent years. This shows that economic outcomes depend more on management of money supply rather than what’s backing that supply.

Safeguard Your Future: Invest in Gold Today

While there will always be proponents for returning to the gold standard, most economists agree that doing so is not the right move. It would restrict the country’s ability to respond to economic crises and make it far too dependent on other nations.

Fortunately, this doesn’t mean that you shouldn’t own the metal. While you may not be able to use a gold coin’s intrinsic value as currency, you can still exchange it for its precious metal content. And since we’re not on a gold standard, there’s no ceiling on the value of your investment.

At Silver Gold Bull, we understand the appeal of a return to the gold standard. Unfortunately for the policy’s proponents, that day is unlikely to come. In the meantime, adding the precious metal to your portfolio is still wise. Visit our Gold Bullion products page today to start investing now.