A New Gold Standard?

At the Foundation for Economic Education Nicholas Anthony muses over whether central banks are trying to engineer a return to the gold standard:

In game theory, opponents can make threats and promises, but this is mostly considered cheap talk. There’s no cost to say it and there is no cost to receive it. So, why not do it? It is for this reason that no player will change what their strategy is in response to cheap talk. However, signaling is a different matter. A credible signal is costly and separates the aces from the jokers.

Accumulating gold is a costly, credible signal.

In the case of the US-China trade war, China could use gold holdings to dump the dollar. If so, the US would incur a cost much higher than the revenue from tariffs levied on Chinese businesses and American citizens. By accumulating these holdings, China signals that coordination is a better long-term policy.

The Chinese authorities could always make the yuan fully convertible and try to have the yuan replace the dollar as the world’s reserve currency. Just a thought.

Here’s an exercise for the interested student. Assume that the EU, China, and India all return to the gold standard. What would the implications be for the United States? I would speculate that no American politician would have the vaguest idea of what to do under a gold standard and would frantically try to pursue a decreasingly convincing business as usual.

That’s not actually something I’m particularly worried about for simple reason. China, the EU, and India are all in worse shape than we are.

15 comments… add one
  • Icepick Link

    I keep thinking that the reason we dumped the gold & silver backed currencies is that we accumulated so much debt in the middle of the 20th century that those currency models became unsustainable. I feel like we keep running up the debt because no one can see a way out of the current mess without everything crashing down. So they keep plodding forward hoping someone will have a good idea somewhere down the line.

    Probably just the fever dreams of a sleep-deprived mind, tho.

  • bob sykes Link

    What would the price of gold have to be? It’s a little over $1,500 per oz. now.

    Also, there isn’t enough physical gold to cover all the gold certificates that have been sold.

    Russia is also accumulating gold, too.

    Germany has tried to repatriate its gold from the US (and UK?), but has been refused. Does it still exist?

    How much, if any, gold is in Ft. Knox?

  • Roy Lofquist Link

    US Gold Reserve: 8,133 tonnes. $327 Billion
    China ” ” : 1,658 – value(current) $66.6 Billion

    Chinese maximum leverage = Washington DC lunch money.

  • The objective of the euro was to free the Germans from the perceived burden that the dollar placed on them. It was largely successful in that, in the process building up the German economy, largely at the expense of the other countries who adopted the euro.

    Its secondary objective was to serve as an alternative to the dollar as the international reserve currency and it has only been slightly successful in that objective.

    I would expect resistance to a new gold standard on the part of nearly every country presently using a fiat currency (most of them) but mostly on the part of the Europeans. The discipline that a hard currency standard would bring would prove ruinous to most of them and they know it.

    It would be worse for China. China’s public debt is genuinely enormous and the Chinese authorities are dependent on expanding that debt to line their own pockets and those of their families.

  • steve Link

    What country would benefit from a gold standard?

  • As I noted in the post, the author of the linked article speculates that central banks are reducing their exposure to the dollar by buying gold.

    I think that every country would both win and lose from a move to a hard currency. Savers would win. Spenders would lose. IMO such a move is highly unlikely.

  • TarsTarkas Link

    Icepick: I believe the reason we went off the gold standard is that the US official value of gold had been set at $35 for many years and the world price had gone above it, resulting in a drain of gold from the US that threatened to turn into a flood. Nixon stopped this drain by taking us off the gold standard but it also turned the dollar into a fiat currency that resulted in a different set of problems.

  • steve Link

    If there were some empirical evidence that a gold standard would reduce financial crashes or promote growth I could be come interested, but I haven’t seen any such evidence. Maybe we could try wampum?


  • All hard currencies are about the same.

    If those espousing folk MMT get their way, you may get your chance.

    Real MMT: increase public credit at the rate that production increases is benign.

    Folk MMT: increasing public credit is always benign.

  • TastyBits Link

    I am late, but I will throw in my 2 ounces, anyway.

    Domestically, there was a gold cover. Each ounce of gold allowed a specific number of dollars, but there was no gold exchange. Under Bretton Woods, dollars could be exchanged for dollars by foreign Treasuries. If I am not mistaken, it was fixed at $35 per ounce.

    @Icepick is sorta right, but the problem was the gold cover. LJB needed dollars to finance the Vietnam War and the Great Society, but with the number of dollars limited, debt could not get out of control.

    @TarsTarkas is correct. There was a run on gold, and the increased creation of dollars caused price inflation for gold and everything else. (Anybody remember the 1970’s)

    As noted, today’s gold rush is reduced currency exposure. Using gold as a reserve currency would mean using gold to run a trade deficit, and when the gold runs out, the deficit trade ceases.

    There is no reserve currency. Dollars are used for trade because they are so plentiful. They have value because everybody agrees they have value, but eurodollars are just entries in an accounting ledger.

    Returning to the pre-1968 state would require repealing G-S and many other banking regulations. A new gold cover would need to be established, and a gold exchange program would need to be established.

    The rate does not and could not be $35 per ounce, and it would need to include M1/M2, M3, and eurodollars. So, $337 billion would need to cover tens of trillions of dollars on ledgers. It would need to be phased in.

    As the gold supply increased, the dollar supply would decrease, and banking restrictions would decrease dollar creation. Additionally, these restrictions would destroy dollars as the debt was repaid.

    It would probably take a decade or more, and at any point, it could be reversed. It would likely cause an economic downturn for much of that time.

    Regarding MMT, it is theoretically possible to increase credit supply in tandem with production capability, but the productive capability needs to produce tangible goods and services. Producing more shovels for hole digging jobs is only as productive as the holes being dug.

    Socialism is only limited by other people’s money to the degree that money is not created fast enough. With a Modern Monetary System, socialism works until you run out of value added productive capacity.

  • Producing more shovels for hole digging jobs is only as productive as the holes being dug.

    My attempts at explaining deadweight loss have usually fallen on deaf ears.

    It is also my complaint about health care and education. You can spend as much money on them as you care to throw at them. Measuring the empirical results is inherently political and inevitably bitterly opposed. Shorter: we’re spending three times on education in real terms what we did 25 years ago and we’re not getting three times the value.

    Perhaps I should add some more definitions to my real/folk dichotomies.

    Real Keynesianism

    Shortfalls in aggregate demand can be offset by credit-based fiscal stimulus when properly timed and allocated prudently. As the shortfall declines the stimulus should be reduced and replaced by increased taxation.

    Folk Keynesianism

    More government spending is always good.

    Real free market economics

    Free markets always result in an optimal allocation of resources. “Optimal” does not mean just or charitable.

    Folk free market economics

    Our system results in an optimal allocation of resources.

  • TastyBits Link

    Unfortunately, the experts are the ones with deaf ears.

  • steve Link

    “Free markets always result in an optimal allocation of resources. “Optimal” does not mean just or charitable.”

    Only when markets are open and honest, and only in the long term. Just based upon history I think it may be impossible for markets to not become distorted, but then they haven’t really been around that long. Absent any kind of policing there will be dishonesty that will warp markets. (“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”) Once you introduce any kind of policing you have the possibility of corruption.

    “Measuring the empirical results is inherently political and inevitably bitterly opposed.”

    Love metrics. What are the chances that we could agree on what metrics we should use?


  • What are the chances that we could agree on what metrics we should use?

    To keep it nice and impersonal let’s ignore health care and focus on education. What metric do you suggest? I don’t believe that there is any metric by which the outputs are proportional to the inputs.

  • Just based upon history I think it may be impossible for markets to not become distorted,

    which is why I believe in using the power of government to reduce the effects of the distortions. At this point Guarneri will point out, correctly, how frustrating it is to have to resort to the government to compensate for the effects of previous government actions. Yes, it is. But markets do not produce just or charitable outcomes.

    Our problem now is that our system is so corrupt that we’re entering positive feedback loop territory. We need better government and we can’t get it by screaming at each other.

    You know we’ve got a disaster when Hillary Clinton is opposed by Donald Trump in the general election.

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