When times are tough, new economic theories get a better hearing. Maybe some old ones, too.

The gold standard is one of the oldest ideas about money, but the hardest of hard-money hawks sense an opening to breathe new life into it. Decades ago, the amount of cash circulating in a country was often limited by the stash of bullion held in its coffers. Especially since 2008, developed-world policy has headed in the exact opposite direction, expanding the powers of central banks to stoke growth. Helicopter drops of money, potentially the next new thing, would be a giant leap further.

For those in the U.S. who see much risk and little benefit in the current course, gold is still a rallying point. And their audience may be growing.

“The fringe has become the mainstream,” said Jesse Hurwitz, a U.S. economist at Barclays Capital in New York. He sees the gold standard as a bad idea but “something we’ll increasingly talk about.”

Of course, full restoration of the system that reigned in the U.S. for a century through the 1970s is almost inconceivable. Even many gold bugs say it can’t be done, and there’s near-unanimity among economists that it shouldn’t be attempted: the U.S. would be in much worse shape, they say, with a Federal Reserve stripped of its ability to freely tinker with the money supply.

But the backdrop to this well-rehearsed debate is changing. Rumbling discontent with the economy has left the establishment under siege, and you can’t get more establishment than the Fed. So, in a curious twist, it’s becoming easier for supporters of hard money -- historically a policy favored by the rich -- to give the idea a populist slant. The money conjured up by central bankers after the crisis, the argument goes, all went to bankers, leaving most Americans no better off. It’s time to tie the Fed’s hands, if not to gold, then at least to something.

David Fuller's view

Should the USA and other countries go back on a gold standard?  No, although I am interested to see that this topic is back in circulation. 

Advocates of a gold standard will point to times throughout human history when it has worked reasonably well, at least for a while.  The last period of gold standard success was during the Bretton Woods Agreement established in 1944, following WWII.  It worked for a number of years because the USA was the world’s strongest economy, by far, and it also held over half of the available gold reserves at the time.  Consequently, it was able to supply readily exchangeable US dollars to European countries and Japan, which needed this liquidity to rebuild their economies.   

However, Bretton Woods began to unravel because countries led by Japan and Germany were increasing their percentage of global GDP.  US Dollars were not only no longer essential to economic recovery, but also seen by other nations as a system which mainly favoured the USA.  After all, the Fed could print £100 bills at will, but other countries had to provide the equivalent in goods and services to acquire them.  Meanwhile, the US economy was becoming weaker and the Dollar more overvalued due to this monetary inflation and growing public debt caused by the Vietnam War. 

In February 1965 French President Charles de Gaulle was the first holder of weakening US Dollar reserves to announce that he was going to exchange some of them for US gold reserves at the official prices of $35 per ounce.  France continued to convert Dollars for gold and other countries inevitably followed this lead. 

In 1971, President Nixon and other US Government officials in financial roles met for several days before deciding to float the US Dollar, meaning that it was no longer pegged to gold at $35 an ounce.  See also: Gold Standard.

My view on a Gold Standard is little changed since the 1970s.  In summary, it is only a good idea if the economy – any economy – is very healthy relative to its international trade partners.  The Gold Standard will add some financial discipline, helping to contain inflation, perhaps for the lengthy medium term.  However, fluctuating economic and political conditions will eventually and inevitably change.  Under adverse circumstances, governments will no longer accept the constraints of a Gold Standard.   

If governments institute a Gold Standard as a cure all for their economic difficulties, they will soon discover that this inflexible prescription is more often worse that the problems which they are trying to resolve.  In today’s environment of slow GDP growth and deflationary pressures, a Gold Standard would soon produce an economic depression, probably lasting for many years.  Theoretically, countries might emerge from this in better economic condition, but at the cost of severe economic difficulties for many years. 

Arguably, a number of EU countries are currently experiencing high unemployment and either deteriorating financial conditions, including bankruptcies and minimal GDP growth, because they have lost their economic flexibility on the Euro Standard. 

A Gold Standard could be even worse because bullion is in thin supply relative to today’s global GDP.  Consequently, the price of bullion could easily be manipulated by speculators.  In fact, some holders of gold are promoting a price target of $10,000 an ounce, on the basis that this would ‘solve the supply problem’.  Needless to say, there is a degree of self-interest in this view, which I regard as unrealistic in a deflationary environment.

The interesting point about Bloomberg’s article on gold above, is its confirmation that the yellow metal has been remonetised in the eyes of many investors.  In fact, gold and other futures traded precious metals including silver, platinum and palladium are among the leaders in this year’s initial recovery of the commodity sector.  Typically, these recoveries in cyclical commodities often occur as multiyear bull trends among stock markets are losing momentum.  Commodities will remain volatile and are therefore best purchased following setbacks.