Question:
Would the United States ever return to the gold standard, and why?
Answer:
When our country experiences fiscal stress, the academics and conservatives often begin talking about returning to the gold standard. The gold standard, under which the dollar is backed by gold was abandoned by President Nixon in 1971.
At the time of the Great Depression, most industrial nations pegged their currency to gold. In order to have monetary expansion, a country had to buy more gold to print more money. When this would happen, gold prices would spike because of increased demand. Although the gold standard is uncommon in today’s economies worldwide, the notion of gold demand increasing during economic recessions still remains today. Some argue gold provides a store of value and that point is not being debated here. However, we have a modern example that shows the fallacy of the notion that gold is a liquid currency. For those who have not watched the Libyan conflict unfold in 2011, the actions of the nation’s long-term dictator—namely, brutality to Libyan citizens—have brought global sanctions on the Libyan government. These sanctions are aimed at starving out the leadership. It has been reported that Moammar Gadhafi has directed all banks in the country to forward their reserves to him, including a reported 500 plus tons of gold. The story ultimately points out that even on the global stage when demand for physical gold is high, gold bullion is relatively unacceptable as a currency. Given the removal of the gold standard, there is very limited reason that gold demand should spike during economic hardships.
We do not believe the United States will ever return to the gold standard. Doing so would take away a critical tool from the central bank to be able to manage monetary policy. The dollar is currently being managed low by the Federal Reserve’s low interest rate policy aimed at spurring economic growth. When growth returns, interest rates will rise as will the relative value of the U.S. dollar.
As mentioned previously, at the beginning of the 1920s, most of the industrialized world held to the notion of backing their currency with gold, at least to some varying degree. Britain led many nations of the day in removing this restriction in 1931, and their economy began recovering shortly thereafter. Some scholars point out that there is significant correlation between the time of removal of the gold standard and economic recovery. Consider that the United States resisted the removal of the gold standard until 1933 at which point there was a significant economic rebound. When you allow central banks to print more money, you provide liquidity to the economic system. This has been proven to cause economic growth.
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