A Return to the Gold Standard?
The history of money is fascinating. For most of the last 5000 years gold has been regarded as money or been an integral component of it. Whether used directly in the form of coin or bullion or as an asset that backed the issuance of paper currency, it always acted as a constraint of governments and banks.
When the governments of empires became frustrated with this constraint in money, usually to due excessive spending on wars, they often attempted to increase the supply of money by debasing the gold content in the coin with other metals. Consumer price inflation usually followed, and soon thereafter a collapse in the empire.
One solution to this gold problem is to use a fiat currency. That is, a currency that is backed by nothing more than a government statement that the currency is legal tender; it has no intrinsic value. Theoretically, an unlimited amount of fiat currency can be issued. Almost every currency in the world today is a fiat currency including the US dollar which has been the world’s reserve currency since the Bretton Woods agreement of 1944.
When Richard Nixon reneged on Bretton Woods and took the US dollar off the gold standard in 1971 the world embarked on an experiment in floating fiat currencies, pricing one in relation to the other based upon central bank controlled interest rates, fiat money supply, and trade imbalances.
Many were highly critical of this move to decouple currencies from gold, and have been calling for a return to the gold standard ever since. However, the economists of the time won the day. They suggested that the science of economics was sufficiently advanced that central planners could more effectively set the money supply and interest rates at the optimum level in order that economies would function more efficiently.
Gold had been branded as a “barbarous relic” by economist John Maynard Keynes and advocates of gold backed currencies that installed discipline into the monetary system were derisively labeled as “gold bugs”. Monetary discipline was out and central planning was in.
For the first decade of this fiat experiment it seemed like the gold bugs’ view was vindicated as excessive money printing led to rampant consumer price inflation. Clearly something was up. The price of gold rocketed from just $35 to over $800 per ounce.
But in 1981 when Paul Volker stepped in and drastically raised short term rates, gold began to sell off, falling to about $250 per ounce two decades later. And once Volker’s induced banking crisis was resolved, and as interest rates gradually declined, the world embarked on two decades of prosperity. The central planners’ management of the supply and price of fiat seemed to be working. Maybe they were right after all. Alan Greenspan was even granted an honourary knighthood by Queen Elizabeth.
The culmination of this prosperity was the dot com bubble in the stock market which burst in 2001, followed shortly thereafter by a real estate bubble which burst in 2007. As faith in the central planners’ ability to manage the economy waned, gold went on another tear from $250 to over $1900 in 2011, only to fall by over 40% in the next 5 years. And in the past 6 months since its 2016 low, it has gotten up off the carpet once again, giving ammunition to the gold bugs to challenge the central planners.
The gold bugs claim that the rising price of gold indicates something is fishy in the fiat monetary system – it’s the canary in the coal mine. They rationalise that the collapse in gold prices from 2011 to 2016 was just a reaction to a flawed belief that the central planning response to the 2008 great recession had repaired the world economy. Others in that community believe that central planner’s distaste for gold has led them to suppress the price of the metal in order to illustrate that there are no real problems in the monetary system. Indeed, Deutsche Bank has been one institution that recently admitted to such behaviour.
One might interpret that there have been no clear winners in this debate between the gold bugs and central planners. In the short history of the fiat money experiment, both sides have had their days in the sun. However in one area central planners always had the advantage. That was that their fiat currency had been declared legal tender by governments who had no interest in returning to a gold standard. And bartering using gold as a medium was impractical and inefficient for conducting commerce. Gold bugs were effectively shut out in any attempt to demonstrate that gold as money was superior to the fiat experiment.
Enter BitGold. This Canadian company was formed in 2014 and may be a game changer. Basically, BitGold is a 100% gold backed digital currency. The gold is stored in various Brinks vaults worldwide and regularly audited by 3rd parties. Gold is the money, and the electronic platform allows individuals to purchase, store, sell and trade gold in any amounts. BitGold can be used in commerce between parties directly or can be easily converted to fiat on a prepaid Mastercard in any amount and used for purchases everywhere that Mastercard is honoured. As well, it can be redeemed for physical gold if an owner so decides.
Since their founding BitGold has merged with GoldMoney and more recently with SchiffGold. As explained in this video, BitGold is still in its infancy, and there are more developments to come. BitGold has thrown down the gauntlet to the central planners of the current monetary system and gold bugs can now have their own gold standard. The reaction to this challenge bears watching. If successful, the world may move back to a gold standard, whether banks and governments want to or not.