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Gold standard: Could it return in the US?
The usual reason given for a return to some kind of gold standard is that gold leads to sound money. It links the supply of money to the supply of gold and since gold reserves increase only slowly, the growth in the supply of money is limited, thus helping to choke off causes of inflation.
The problem is that in practice, things do not always work out like that - from 1919 to the 1930s, US prices were anything but stable.
Kenneth Rogoff, an economics professor at Harvard University, agrees that a gold standard would not necessarily be more stable than the current monetary system.
"The price of gold fluctuates a lot and therefore the price of your currency would fluctuate a lot," he says.
Rogoff points to the fluctuations of the dollar in the 19th and early 20th centuries when the dollar was tied to silver and gold.
"You find yourself tied to the availability of the particular metal."
The US had another go at linking the dollar to gold after World War II.
From 1945-1971, the period of the "gold exchange standard", the US fixed the dollar to gold at $35 an ounce. Growth rates were higher and rises in wealth were more equitably shared across society than in the years that followed.
Unemployment has been higher, growth lower, and wealth more unevenly distributed since the US dollar came off gold in 1971. This could have been coincidence, however. Many would argue that the dollar's link to gold contributed little to post-war prosperity.
Furthermore, the US and other advanced economies were on the gold standard together. So if the gold drained from one part of the system, it pooled in another part, with the concomitant expansion of the money supply, demand and the potential to pull in goods from the part that had been depressed . Theoretically it was a self-sustaining system.
So how could the US implement a new gold exchange standard today?
"For a gold standard to work, people have to believe that you will never go back to fiat money," says Rogoff. Fiat money is the way the modern money supply works. Dollars, euros and pounds are created by central banks without reference to any underlying asset such as gold or silver.
"If people doubt your resolve, if you are not completely credible, they will want to get your gold," he says.
The current price of gold is about $1,665 an ounce. Theoretically, the US government could promise to redeem dollars for gold at that price. Alternatively, the US could in effect devalue the dollar against gold by fixing the price lower, at say $2,000 an ounce.
The initial problem would be the maintenance of credibility. At the end of the 1960s, foreign central banks no longer believed US assurances that the gold standard would be maintained and started demanding US gold - in other words, redeeming dollars - in ever greater quantities.
Such demands would start after any return to gold. For Anil Kashyap of the University of Chicago Booth School of Business, any suggestion of a return to gold is "incredibly crazy". If the US returned to gold unilaterally "all you would hear is a giant sucking sound as Fort Knox was drained" - with no corresponding benefits.
Holders of dollars - such as foreign central banks - would want to test the US government's resolve and the demand for gold could mount, especially as there is no reason to think that other major economies would also want to return to gold. There would also be speculative attacks on the dollar just as there is with other fixed exchange rates - eg the Black Wednesday sterling crisis of 1992.
Charles Wyplosz, professor of international economics at the graduate institute of international and development studies in Geneva, says that if the US government substantially devalued the dollar "it could buy a few years" but eventually the system would break.
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