We have a visceral fascination with gold. Two hundred thousand years ago, when we dipped our heads to drink from a quiet stream, its glimmer first caught our hominid eye. The utter brilliance and its invulnerability to the elements made this aureate mineral a symbol of strength, beauty and privilege. In 700 BC, merchants from the Iron Age kingdom of Lydia, now western Turkey, created the first gold coins. These crudely stamped lumps, made from a gold and silver mixture known as “electrum”, became the new currency for Lydian traders. By the time of Croesus of Mermnadae, Lydia had amassed so much gold that the world was forever left with the phrase, “Rich as Croesus.”
In 1640, when King Charles I decided to appropriate all the merchant-owned gold held in the Royal Mint as a forced loan, the goldsmiths of England became the vaults of choice for traders wishing to stash their hard-earned currency. The goldsmiths would then hand out receipts recording the amount and purity of gold they held for each merchant. Eventually, this practice evolved into promissory notes, loans and fractional reserve banking. For almost three hundred years after, the world experimented off-and-on again with variations of the gold standard, until 1933 when FDR cut the cord to gold in an effort to stimulate an economy reeling from the Depression.
Some experts argue that Hoover’s determination to remain on the gold standard prolonged the Depression. You see, the U.S. Federal Reserve had been bound by the 1913 Federal Reserve Act which required banks to back 40% of their notes with gold. Therefore, the US Fed didn’t have the necessary flexibility in monetary policy to expand the money supply. When higher interest rates hammered the dollar with deflationary pressure in 1931, commercial banks converted their federal reserve notes into gold. This depleted gold reserves and took money out of circulation. Fear of an immediate currency devaluation, drove the citizenry to make multiple runs on the banks, causing even further contractions in the money supply. Not so good when you’re trying to rebuild an economy.
However, there are some experts with a different point of view of how events unfolded during the decade of the Dust Bowl. Alan Greenspan, in a 1966 paper, Gold and Economic Freedom, contended that it was Britain dropping the gold standard in 1931 that sparked the banking failures of the 1930s.
In The Case for Gold, penned by Rep. Ron Paul and Lewis Lehrman, the authors contend that failure of the America gold standard currency originated in the financial sector, “From our historical analysis, it becomes clear that the problems of money and the business cycle under the gold standard, of inflation and contraction in the 1818-36 era, of World War I inflation, of the boom of the 1920s and the disasters of the Great Depression of 1929-33, stemmed not from the gold standard but from the inflationary fractional-reserve banking system within it. This inflationary banking system was made possible by the government's imposition of a central bank: the Federal Reserve, the Bank of the United States, or by the quasi-centralized system of the national banking era after the Civil War.”
Steve Forbes stated in his book, Gold: the Monetary Polaris, “…let us focus on the period after the resumption of the gold standard in 1879. Here, we find nine recessions in thirty-four years, from 1880 to 1913. This is a rather large number, raising the question of whether what the NBER (National Bureau of Economic Research) means by “recession” for that period is the same as what we mean today. With so many setbacks, it seems a wonder that any progress was made at all. Despite these apparent difficulties, per-capita GDP, in terms of ounces of gold (equivalent in those days to nominal dollars), rose 95% between 1880 and 1913. Per-capita GDP, measured in ounces of gold, is lower after 42 years of Mercantilist floating fiat currencies than it was in 1970. Much lower.”
Since bottoming out in March 2009, the Nasdaq climbed over 250%, the NYSE jumped 130%, the S&P 500 rocketed 182% while the Dow increased more than 145%. Many consider the market as a reflection of the economy, if the boards are doing well, the economy must also be healthy. Unfortunately, this isn’t always the case. The aforementioned market gains were based on cheap money made available by quantitative easing, not corporate profits and revenue growth. With a worrisome EU and a debt bubble brewing in China, we may be in for another major market correction. If we had been on some sort of gold standard, that cheap money wouldn’t have been available.
Giving central banks the sole freedom to print money has led to world of crushing national debt. As of 2013, Canada carried $1.2 trillion across federal and provincial governments. The United States now has somewhere in the neighborhood of $16.0 trillion in debt. Sure, we have experienced growth in the forty some-odd years since Nixon ended convertibility of US dollars to gold, but at what cost?
Justus Parmar, CEO of the Justus Parmar Group, a private merchant bank based out of Vancouver, put in his two cents, “A gold standard would primarily keep more people in governments honest, because they won’t be able to print more money than they can back. You need to be held accountable to your money supply. This is a big problem. There is no reason for our government to be in debt. Countries are supposed to be stable. We need to run our country like it was our household, but nobody wants to be financially responsible because nobody wants to be voted out.”
Chris Parry, of Equity.Guru, chimed in, “Yes, we should adopt a gold standard. I mean, as a gold producing country, it wouldn't suck. But it won't happen as long as banks and governments can wriggle their way out of problems (or punt them down the road) by just printing more money (or, in the case of banks, lending out money they don't actually hold). The gold standard would mean the US government would either need to find shit tons of gold to cover its constant creation of cash, or it would need to live (haha) within it's (oh, my sides) means.”
Governments are inherently flawed when it comes to monetary policy. They depend heavily on re-election and therefore easily swayed to make up money in order to sweep economic problems under the rug. The problem is, we’re going to have to pay the piper at some point, unless we happen to win another world war. However, now that international conflict has evolved beyond a state-sponsored activity into a disorganized barrage carried out by well-armed radicalized wingnuts, the chances of a winnable world war in our future is slim to none. Maybe it’s time for central banks to release their death grip on our currencies.
There isn’t just one solution when it comes to commodity-based currencies. Countries could craft solutions suitable to them and as a result, a world gold standard would emerge as it did in the early 1900s. You can have commodity baskets that would link to currencies, leveling the playing field for non-gold producing countries.
This isn’t to say the gold standard isn’t without its own problems. Countries that produce gold would have an automatic upper hand. Gold supplies are unreliable and can be affected by both labor disputes and geo-political tensions. If the output of goods and services exceeded the gold supply, the central bank wouldn’t be able to print money to keep up, thus putting a break on economic growth.
Another argument is the impossibility of implementation. As mentioned earlier, the United States has approximately $16.0 trillion dollars of debt. What wasn’t mentioned is that the U.S. only has enough gold to pay down 2.7% of that debt. In order for gold to actually cover the U.S. debt in its entirety, gold would have to be worth approximately $62,000 per ounce. Also, economic growth for the last 160 years has averaged 2-3 percent, gold production never came close to keeping that pace.
A massive increase in the price of gold would be a boon to junior miners, like Bonterra Resources (TSX: V.BTR, Forum) with its Gladiator and Larder projects located in the Abitibi subprovince, Brazil Resources (TSX: V.BRI, Forum) with its Titiribi Gold-copper Project located in Colombia and Alexandria Minerals (TSX: V.AZX, Forum) with its highly prospective Cadillac Break Properties located in the storied Val d’Or.
Even if we did adopt the gold standard again, markets would still have the potential for volatility when countries holding gold decide to, for whatever reason, dump their reserves on the open market. And last but not least gold has no real connection to our standard of living.