The United States of America began its country ship on a bimetallic standard, which meant that economic transactions occurred through gold and silver purchases (or bank notes drawn against gold and silver deposits). Between 1780 and 1830, most Americans bought with silver—much more common and less risky than carrying gold—and held their savings in silver. This pattern only shifted after Congress intervened (an unfortunately common event in the history of U.S. currency) in 1834 when lawmakers artificially lowered the price of gold relative to silver. Silver exports rose rapidly and, consequently, the United States entered its first de facto gold standard. (Washington D.C. did not officially recognize a classic gold standard until 1879.)
Over the next 140 years, the U.S. government fostered an antagonistic relationship with the “yellow metal.” War, depression, and the growth of public expenditures stacked on top of one another until Richard Nixon officially closed the gold window in the 1970s. Once a nation leaves a metallic standard, however, it rarely goes back. Even so, many economists contend that a modern gold standard would rein in reckless spending programs and currency depreciation (inflation). This article examines what a return to the gold standard might look like in the 21st century.
A Modern Gold Standard: Could It Work?
Opponents to a return to the gold standard often point out that the modern economy is too advanced to be constrained. They say that digital trading, sophisticated public instruments, and Keynesian fiscal policy might fail if each banknote had to be backed by physical gold or silver. There is an immediate and superficial plausibility to their argument. After all, the classic gold standard was long gone before the digital financial age. As long as you don’t think about it for too long, it just seems that something so “antiquated” would surely be too clunky for a modern world.
Reflect a little longer, though, and there isn’t any reason that gold-backed transactions would slow down the economy. The spot price of gold updates several times a day already in commodity markets. A U.S. dollar backed by gold wouldn’t fit into a wallet any differently than one backed by the Full Faith and Credit of the United States Treasury. Sure, American citizens would need to keep gold deposits (or claims to gold deposits), but that’s not very challenging. Gold bars and coins are already stored in depositories around the country. Banks wouldn’t have any more difficulty putting metal into their vaults than bricks of green paper currency.
We would still have credit cards, money market accounts, stocks, paper bills, and digital paying apps on our cell phones. The only difference is that banks would have to perform reconciliation and transfer gold deposits (instead of paper ones) at the end of business days. Governments could still borrow and spend. Their borrowing and spending would just need to be backed by a limited metal, which would serve as an uncomfortable but necessary restraint on public official’s tendency toward profligacy.
Designing a Modern Gold Standard
Obviously, post-industrial economies operated on gold standards in the past, so much of the characteristics of previous gold standards could still apply today. Banks would store and protect gold. Consumers would either carry physical gold or some substitute claim (likely paper or digital) against their gold deposits. Rather than holding $3,000 in a checking account, one might instead hold 2 oz of gold. In this circumstance, a gold-owning citizen could pay for their $6 coffee and bagel with a card that transferred ownership of 0.002 oz of gold to the coffee house. It wouldn’t be any more difficult to track shares of gold ounces than shares of Apple stock.
Of course, going from our current fiat system to a gold one would be problematic. For the average worker, it wouldn’t be any more difficult than exchanging their current fiat balances for a commensurate amount of gold. For governments, central banks, and major financial institutions, though, it would be more complicated. One proposal suggests that central banks could return to gold by switching from the targeted Federal Funds Rate to a targeted spot price of gold. As interest-paying instruments matured, central banks and their member commercial banks would replace those debt instruments with real gold deposits. There would likely be a target conversion rate that would be much higher than the present value of gold.
This would be difficult to get right, especially for politicians who want to control everything. One need look no further than Britain in the 1920s to see an economy in shambles because the government botched the gold conversion rate. Since most people are not trained to think of transactions in terms of weight, as a gold standard would ultimately require, most items would still be priced in dollars and those dollars would have a stated convertibility to gold.