Recently, there has been discussion from outlets like Forbes and Yahoo Finance about the gold standard. Since the 1970s, the dollar has been unhitched from the nation’s gold reserves and has only grown from strength to strength.
However, some economists have warned that a debt crisis is looming. A return to the gold standard has been proposed to remedy this, something deeply unpopular in many circles. Here’s a rundown of what the gold standard is and how it may affect the economy and the businesses in it.
The Gold Standard & Dollar Strength
The gold standard is simply where every dollar is backed by the price of gold in a country’s reserves. The real value is the gold but, since we can’t pass heavy gold bullion over the counter, we used dollars that represent gold.
As BRICS nations amass a record amount of gold, the dollar’s power has come under question in some circles. This is something that can be tracked using the DXY chart tracking dollar strength and other variables. It weighs the dollar strength against that of its greatest allies, from the euro to the Japanese yen, which establishes where the dollar is in terms of relative value. As the world reserve currency, the dollar is the most valuable currency in the world.
Since the end of the Bretton Woods Agreement in the 70s, the US dollar has existed as a fiat currency, meaning it is not backed by a valuable material. Now that a lot of money is spent online, the gold standard as it once existed is even more unfeasible. To solve the digital problem, a gold-backed digital currency has been proposed but digital currencies can have their own trust and privacy issues.
Drawbacks Of The Gold Standard
That brings us to the drawbacks of a gold standard system (or really any system that is pegged to a physical commodity). First, gold like any asset can and will fluctuate if it’s the beating heart of an economy.
During those fluctuations, it would be harder to control recessions and even worse, depressions. The Great Depression of the 1930s was famously exacerbated by the gold standard, as people went on a bank run to hoard gold and hurry the crash that followed.
It would also limit certain areas of finance, particularly government spending where billions are spent on things like national defense of the US and beyond. It could incentivize destructive gold mining practices, too. Lastly, it’s just unpopular with many economists who have grown up in a post-gold standard system.
Benefits Of The Gold Standard
The argument for the gold standard lies squarely in long-term financial health. While fluctuations may occur in gold prices, a gold standard reduces inflation as it stops the government from printing money.
Gold’s value is also self-evident and self-regulating, so currency power isn’t as tied to other currencies or the size of a county’s military. Proponents agree that it would limit government spending, they just see it as a good thing, not least for keeping the national debt in control. The same can be said for the trade deficit. Those two have attracted a lot of support from businessmen and politicians alike.