Returning to the Gold Standard

Talal Abu-Ghazaleh

Everyone is concerned about the state of today’s economy and the eroding value of their money. If we look to our  history over the last fifty years, we can repeated waves of  recession, inflation, and instability which are signs that the there is something wrong with the current system. Some have urged a return to the gold standard which may not be such a bad idea. 

The gold standard is a monetary system where fiat money is linked to gold at a fixed price, guaranteeing that the money supply is steady and that its value is not dependent on the decisions or whims of central banks. The US monetary system was based on the gold standard after the Second World War, but it abandoned it in 1971 under President Nixon. This gave the US free reign over how many dollars it could print as under the Bretton Woods agreement, it needed to back every $35 dollars with an ounce of gold.

The US abandoning of the gold standard has been a major cause of the numerous economic and financial challenges we repeatedly face, such as inflation, recessions, debt crises, asset bubbles, and bailouts, with inflation recently reaching its highest level since the 1980s. This has affected us all because of our reliance on a paper dollar with no real backing. Whether we like it or not, we are all linked to the US dollar which is the main reserve currency held by countries around the World, being the most widely used currency in international trade and financial transactions.

I believe that implementing the gold standard would promote better stability, growth, and prosperity by preventing inflation, financial crises, interest rate distortion, and unrestricted money printing of cheap money. It would limit the power of central banks and governments in interfering with the markets or in manipulating interest rates. This would also restore confidence and trust in the money system as it would be backed by solid reserve of valuable assets rather than by promises or expectations.

The US dollar's reserve currency status is closely tied to US hegemony and influence in the global system. Having been the chair of numerous international accounting associations as well as a member of the Bretton Woods Committee, I can understand why the US would be reluctant to go back to the gold standard as that would limit its flexibility on the global stage and would require backing  all the dollars in circulation with gold reserves. 

The gold standard may not be a perfect system, but it preserves the value of money and shields economies from inflation and manipulation.