Home > Uncategorized > Reinstating the gold standard

Reinstating the gold standard

from Lars Syll

Ninety years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time — the gold standard. He lamented that

advocates of the ancient standard do not observe how remote it now is from the spirit and the requirement of the age … [T]he long age of Commodity Money has at last passed away before the age of Representative Money. Gold has ceased to be a coin, a hoard, a tangible claim to wealth … It has become a much more abstract thing – just a standard of value; and it only keeps this nominal status by being handed round from time to time in quite small quantities amongst a group of Central Banks.

goldEnding the use of fiat money guaranteed by promises for currencies once more backed by gold is not the way out of the present economic crisis. Far from being the sole prophylactic against the alleged problems of fiat money, as the ‘gold bugs’ maintain, a return to gold would only make things far worse. So yours truly — just as Keynes did — most certainly rejects any proposals for restoring the gold standard.

The ‘gold bugs’ seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!

Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already ninety years ago in Essays in Persuasion:

Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.

Allowing this debt deflation process — the analysis of which was later developed by Irving Fisher and Hyman Minsky — would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.

So why would anyone want to reinstate a gold standard? The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and — even harder than with ‘independent’ central banks — force countries to pursue restrictive economic policies that at all costs keep inflation down.

Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):

We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses.

gold_bugSo, next time you want to come up with some new idea on how to solve our economic problems with a magic gold bullet, remember new economic thinking starts with reading old books! Why not start with the best there are — those written by John Maynard Keynes.

  1. September 30, 2021 at 6:08 am

    In the past when borrowers couldn’t pay their debts with interest, they became the serfs of money lenders. That’s why usury was often forbidden. Usury was the road to serfdom. Most people have forgotten about that now. Nowadays most money is a debt. Money is loaned into existence and must be returned with interest. But if the interest rate is 5% and there is € 100 in existence then € 105 must be returned. So where does the extra € 5 come from?

    There are a few options:

    – Lenders (on aggregate) spend some of their balance so borrowers (on aggregate) can pay the interest from existing money.
    – Some borrowers default and (part of) the balance is not returned.
    – Borrowers (on aggregate) borrow the extra € 5.
    – The government borrows the extra € 5.
    – The central bank creates € 5 out of thin air to cope with the shortfall.

    All these things happen and often at the same time. In theory, the first two options suffice, but in reality, they do not. Lenders on aggregate let their capital grow at interest. A few defaults are acceptable but too many defaults can cascade into a financial crisis and cause an economic crisis. The cost of letting the financial system fail is so big that this is not an option. If no one else is borrowing the government has to step in. In this way, debts continue to grow.


    So, if you know the problem, you can start with a solution. Therefore, I advise you to start reading Silvio Gesell rather than Keynes.

  2. Ken Zimmerman
    September 30, 2021 at 10:01 am

    The movement of gold is technically an automatic process, but it is not problem-free. The adjustment process could be very painful, particularly for the deficit country. As its money stock automatically fell, aggregate demand fell. The result is not just deflation (a fall in prices) but also high unemployment. In other words, the deficit country could be pushed into a recession or depression by the gold standard. A related problem is one of instability. Under the gold standard, gold is the optimum bank reserve. A withdrawal of gold from the banking system could not only have severe restrictive effects on an economy but could also lead to a run on banks by those who wanted their gold before the bank ran out.

    These problems emerged during the Great Depression of the 1930s; the gold standard contributed to the instability and unemployment of that decade. Because of the strains caused by the gold standard, it was gradually abandoned. In 1931, faced with a run on its gold, Britain abandoned the gold standard; the British authorities were no longer committed to redeem their currency with gold. In early 1933 the United States followed suit. Although the tie of the dollar to gold was partially restored at a later date, with the expected recessionary, unemployment, and instability problems. But one feature of the old gold standard was omitted. The public was not permitted to exchange dollars for gold; only foreign central banks were allowed to do so. In this way the U.S. authorities avoided the risk of a run on their gold stocks by a panicky public. But it did prompt it seems a series of gold robberies.

  3. Edward Ross
    October 2, 2021 at 12:12 am

    I maybe a bit slow, but it amazes me that the value of the fixed rate of gold as a means to facilitate international exchange for countries that had national sovereign currencies that enabled them to print funny money to look after their citizens , create jobs and keep the internal economy functioning so long as they did not let the funny money go into foreign hands. how about a debate on the value of this guys. Ted

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