Is the World Gravitating Towards a Gold Standard Once Again?

Signs of a Shift Towards a Gold-Based Monetary System

Steve Forbes, a prominent figure in the world of finance, has recently suggested that the world might be subtly shifting towards a gold-based monetary system. This claim, made in an article in Forbes Magazine, might seem surprising given the widespread disdain for the gold standard among economists and financial officials.

Forbes argues that this disdain is misplaced. He points out that during the 180 years when the dollar was tied to gold, the U.S. experienced the most significant long-term growth in human history without the destructive effects of price inflation. Since the dollar's link to gold was severed, average historical growth rates have fallen by about a third. Forbes suggests that the median household income today would be at least $40,000 higher if the traditional pattern of growth had been maintained during those 180 years. However, the idea of a gold-based monetary system is universally scorned, primarily because it limits the growth of government.

Why Is a Gold Standard Generally Disliked?

The primary reason for the widespread disdain for a gold standard is that it restricts government growth. The U.S., by rejecting the gold standard, arguably traded economic growth that benefits the average person for government growth that benefits the political class.

The first steps to abandon the gold standard were taken by Franklin D. Roosevelt in the 1930s. With the dollar tied to gold, the Federal Reserve was unable to significantly increase the money supply during the Great Depression. The Federal Reserve Act required the central bank to hold enough gold to back at least 40 percent of the currency notes in circulation. However, the central bank was low on gold and up against the limit. To solve this problem, Roosevelt nationalized gold, removing it from public hands, and then arbitrarily increased the fixed price of gold to $35 an ounce. This move effectively increased the value of gold on the Federal Reserve's balance sheet by 69 percent.

The last link to the gold standard was severed by President Richard Nixon in 1972 when he closed the "gold window." This action allowed the Federal Reserve to print money with virtually no restraints.

Could the Gold Standard Make a Comeback?

The consequences of this monetary malfeasance include incentivizing debt, devaluing the currency, and driving malinvestments in the economy and boom-bust cycles. These negative impacts could push the world back towards a gold standard.

Forbes identifies four signs that suggest a return to some form of monetary gold standard. These include central bank gold buying, the rise of cryptocurrencies, the binge of debt creation, and the rise of BRICS, an economic cooperation bloc.

Central banks have been buying gold at a record pace, with China, India, Russia, Turkey, and other emerging market banks driving this buying spree. The rise of cryptocurrencies, according to Forbes, is a "high-tech cry for help in the face of increasingly unreliable fiat currencies." The binge of debt creation, with global debt now at $300 trillion, three times global GDP, is unsustainable. Finally, the rise of BRICS, which has floated the idea of an alternative currency to compete with the dollar, reflects a general shift away from the dollar and towards something else, possibly gold.

What Would a Gold Standard Mean?

A return to a gold standard would likely drive the price of gold significantly higher. Financial analyst and investment banker Jim Rickards also believes that the world is leaning towards a gold standard. He suggests that if confidence in command currencies collapses due to factors such as excessive money creation, competition from Bitcoin, extreme levels of dollar debt, a new financial crisis, war or natural disaster, central bankers may return to gold not out of choice, but out of necessity.

If the world were to turn to gold, Rickards calculates that gold would need to settle somewhere in the neighborhood of $27,000 an ounce. There are many obstacles in the path back to sound money, but as the saying goes, necessity is the mother of invention. If the global fiat system collapses, it has to be replaced with something. Gold has been money for 5,000 years, so it is a logical choice. As the saying goes, eventually, economics always wins.

Final Thoughts

This article presents a thought-provoking perspective on the potential return to a gold standard. What are your thoughts on this matter? Do you believe the world is gravitating towards a gold-based monetary system? Feel free to share this article with your friends and engage in a discussion. You can also sign up for the Daily Briefing, which is available every day at 6pm.