A Gold Standard Is Unthinkable No More

MARTIN HUTCHINSON and JOHN FOLEY write in the WSJ:

Fiat money has worked well since Richard Nixon ended the dollar’s peg to gold 40 years ago this week, but this latest recession must gnaw at believers. If years of ultra-cheap cash give rise to serious inflation or an accelerated retreat of the American currency, the gold standard, however erratic and deflationary, could start to appeal again.

The arrangement born at Bretton Woods and used for nearly three decades was not a true gold standard, as it was entirely intergovernmental and the private holding of gold was illegal in America. It thus lacked the virtue of independence from political meddling, failed to provide anti-inflationary benefits and collapsed once its American sponsors no longer controlled the world economy.

The true gold standard, in which gold coins circulated freely as legal tender, was started in Britain in 1717 and lasted for just under 200 years, interrupted only during the Napoleonic wars.

Compared with an ideal, stable and noninflationary monetary system, free from influence by elected officials, the gold standard has two flaws. The metal’s supply is erratic. It can soar unexpectedly with new discoveries, thus causing currency values to fluctuate. Conversely, new deposits tend to be found slowly, making a gold standard excessively deflationary when population growth is rapid. That is what
contributed to the standard’s breakdown after 1900.

World population growth is now declining after its annual peak of 2.2 percent in the early 1960s. By 2030, it is forecast to fall below the 0.72 percent rate of 1900. That would make a gold standard practicable and not too deflationary.

That doesn’t make it any more likely that central bankers would embrace it, despite advocacy from critics of quantitative easing and the Federal Reserve like Steve Forbes and Ron Paul. For one thing, it would drastically undercut the banks’ influence.

But further chipping at the dollar’s credibility, further downgrades of United States credit or other harmful results from years of very low interest rates could bring more people around to the idea of a new reserve currency. A return to the gold standard remains unlikely, but it’s no longer unthinkable.

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