What is the “Gold Standard”?

I’ve been reading economic articles and this based with personal conversations leads me to believe that the vast majority of people do not know what the Gold Standard is or, even worse, think they know but are mistaken.

I’m not going to try to explain the entire thing here and I’d suggest a lengthy perusal of the Gold Standard article at Wikipedia if you have more than a casual interest. Nor will I offer my opinion on whether returning to one form or another of the standard is a good idea. This blog is just to explain the standard in modern terms.

The most common misconception I see is that the Gold Standard is a rigid system wherein the total amount of money available for a nation to spend is equal to the market value of the gold they have in reserve. This is fairly close to the original gold specie standard which proved an unsustainable model for a variety of reasons that I won’t discuss today. Suffice it to say that almost no economist considers it a sustainable model.

What Congressman Ron Paul and other Libertarians generally reference as the gold standard is something called the Bretton Woods System. In this system, which took effect in 1945, other countries fixed their exchange rate to the United States and we promised to maintain the price of gold at $35 an ounce. Thus gold was no longer a commodity to be bought and sold which would inevitable lead to price fluctuations. Gold was largely never a commodity but simply money itself. I always cringe when someone talks about the intrinsic value of gold. It has little.

But at its heart the Bretton Woods System merely fixes the price of gold at $35 an ounce and other nations agree to keep their own exchange rate equal to that of the United States.

There are good arguments as to advantages and disadvantages of the Bretton Woods system.

President Nixon abolished the already faltering Bretton Woods system in 1971. There were good reasons for this and a lengthy perusal of the Bretton Woods article is worthwhile.

Looking back with the knowledge of the current economic crisis it seems that one of the best things the system did was prevent huge deficit spending. In 1970 the U.S. debt was about 370 billion dollars. In 2010 it stood at 13.5 trillion dollars. There are a lot of ways to parse that including as a percentage of the Gross Domestic Product but I won’t delve into that little debate. What is clear, I think, is that the departure from the Bretton Woods System clearly precipitated vast deficit expenditures.

One of the major negatives with gold as an economic standard is its relatively fixed quantity. Thus, as a nation needs more money, for whatever reason, there is none to spend. This crimps economic growth and limits the ability of lending institutions. How many of you would have a house, a car, or much of anything without loans in one form or another?

So, I hope this makes a murky subject slightly more clear. As always, let me know what you think in the comments section!

Tom Liberman
Sword and Sorcery fantasy with a Libertarian Twist

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