The world is experiencing moments of uncertainty, not only because of the threat of death that hangs over citizens, derived from the coronavirus pandemic, but also because of the fear of the economic crisis that will make its effects felt when the virus has been defeated. There are many proposals that are being launched in recent times, although there is one that interests us in particular: would an eventual return to the gold standard be the solution ? We will dedicate this post to discussing it.
The gold standard has been an economic model in force for many years in the Western world and which proved its validity until, in 1971, US President Richard Nixon put an end to its last reminiscences, granting absolute monetary power to the Federal Reserve which, until the date, has led us to several financial crises on a global scale.
The Search For A New Model
After the 2008 crisis , various analysts from the United States, Europe and Asia questioned the current economic model , which had caused dysfunctions such as the housing bubble, the dot-com bubble, the subprime mortgage crisis and, in short, the devastating financial crisis that began in 2008 with the collapse of Lehman Brothers.
What was called into question at that time was the economic model based on the dollar standard, which was adopted from 1971, when Nixon suspended the convertibility of the dollar into gold , annulling what was established in the Bretton Woods Agreements (1944) and giving the Federal Reserve enormous powers and ability to increase money in circulation.
As an alternative, the analysts did not propose any of the other currencies that, at different times, had been considered safe havens (euro, sterling, Swiss franc, Japanese yen, Chinese yuan). What they raised was a possible return to the gold standard .
In fact, even the United States Congress went so far as to create a commission that brought together economists, historians, and bankers to debate the issue.
What we want to raise, in light of the economic crisis that is looming after the Covid-19 pandemic, are the possible benefits that a return to the gold standard would bring.
Sound Money
Before we even imagined what was coming our way, a current of economic thought was launched in the United States, which advocated real, hard and hard money: ‘Sound Money’ .
A current headed by Ron Paul , an American Republican politician, twice a candidate for the presidential elections (2008 and 2012) and, in both cases, controversially defeated by John McCain and Mitt Romney.
Paul was the creator of the Freedom Party. A follower of the Austrian economic school and the Mises Institute, the Texas politician is one of the staunch defenders of precious metals as a means of payment and a return to the gold standard.
In fact, one of his followers is the Republican representative for the state of West Virginia, Alex Mooney , author of a bill, presented to the United States Congress in April 2018, which proposed a return to a monetary system based on on the gold standard .
His arguments could not be more forceful: since the gold standard was abolished as such, in 1913, the dollar has lost 96% of its purchasing power . Only since the year 2000, the US currency is worth 30% less. And with the 2% inflation target set by the Federal Reserve, the dollar will lose half of its purchasing power in each generation (35 years).
By contrast, with the gold standard in full force, the US economy grew at an annual rate of 4% , double the rate achieved since 2000.
It is not strange that this movement has achieved that the parliaments of dozens of states of the Union have approved laws favorable to the use of gold and silver as means of payment, eliminating the taxes that were levied on them.
Arguments In Favor Of A Return To The Gold Standard
According to a study carried out by AdriánRavier , an economist at the Juan de Mariana Institute , there are sufficient arguments to think that a return to an updated system of the gold standard could be the real solution to the global financial crisis of recent years.
According to this study, the arguments against the gold standard by important names in the economic world, such as the former presidents of the Fed Alan Greenspan and Ben Bernanke , or the economist Paul Krugman , are easily refuted.
From this Institute they deny that the gold standard was the cause of the American Great Depression of 1929-33 . In those same years the pattern was in force in Canada, a country that did not suffer the economic panic of its neighbor to the south. Rather, it was Federal Reserve policy that ultimately caused it.
In addition, a transition to this system would not be particularly costly (as happened in the EU with the introduction of the euro), since it would not be necessary to redenominate prices, nor would prices go up suddenly, if the proper parity between the currency and gold is established.
According to the experts, the reasons that led to the devaluation of the dollar against gold, in 1933, by the then US President Franklin D. Roosevelt , and to the inconvertibility of the dollar, in 1971, decreed by Richard Nixon, was the deficient operation of the agency that sets monetary policy, the Federal Reserve.
The impossibility of returning to the gold standard is also argued because there is not enough metal. Actually, it does exist; it is enough to correctly define the price of the coin in terms of gold , avoiding, as now happens with paper gold, an imbalance between the existing metal and the supposedly necessary to guarantee the contracts.
The only real problem and main obstacle to the reintroduction of the gold standard is that it cannot be a unilateral decision of a country, but rather a global return to the gold-based system.
And it is that, as the expert on monetary issues Friedrich Hayek pointed out in 1943 :
