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How would a modern Gold Standard work?

Gold standard

Keith Weiner, CEO of Monetary Metals, writes for Glint on the feasibility of a modern gold standard and why the concepts continues to hold, very real, currency

Many people believe the gold standard would be a step backwards. They think of people walking around wearing sackcloth robes, cinched by rope belts with jingling coin purses. They might get this impression from economist John Maynard Keynes who called the gold standard a “barbarous relic”. Or, they could be listening to some gold bugs, who insist payments should be made exclusively in physical gold.

No one wants to be forced to carry coins, or risk a week’s wages to pickpockets. We are now accustomed to using plastic cards, and, increasingly, smartphones, to pay for stuff. Better yet, Uber showed us that you can order a ride without having to fumble for payment.

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I have been asked many times to describe how the gold standard will work in the 21st century. As American baseball legend Yogi Berra said: “It’s tough to make predictions, especially about the future”.

In 1987 — just 30 years ago — no one could have envisioned those smartphones and ride share services. Innovation will continue to change how we live, work, and play. That’s a good thing, as it makes life better.

Just like today, the coming gold standard will have bank accounts, deposits and withdrawals, payments, online transfers, payment apps, choice of credit or debit, investments, and many other modern financial features.

There will be changes too. I can’t imagine all of them, but I can highlight one that is key. Gold gives people a choice that they do not have in our present paper standard: the choice to be a creditor. You can lend if you like the interest rate and risk. Otherwise you can withdraw your gold. If you take it home, or move it into secure storage, you are not allowing it to be lent out to any government, bank, business, or consumer.

The paper standard disenfranchises savers. Suppose you hold a £5 paper note. You might not plan to lend to anyone. You may believe that by hoarding paper currency you can avoid exposure to the banking system. However, the note is merely the Bank of England’s liability. In turn, the Bank lends to the government. You are forced to be a creditor, and your savings are used to finance their spending.

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Of course, anyone can opt out and buy gold. Unfortunately, this comes with a risk. The price of gold could fall, as it did from £1,185 per ounce in 2011 to £700 at the end of 2015 — a 41% loss. Buying gold can sometimes be a good bet (I calculate that its current price of roughly £979 is a small discount to its supply-and-demand fundamentals). However, owning gold is a speculation, which is one reason why gold is not a mainstream asset.

In the gold standard, by contrast, owning gold incurs no price risk. All prices are measured in terms of a fixed weight of gold. There is no ‘price’ of gold against this because it is the yardstick, not the variable.

Gold protects the saver, because it enforces an honesty that is absent today. It does not enable unlimited borrowing without worrying about how a debt will be repaid. It does not allow interest rates to go to zero as the two-year gilt is right now, (or negative as they have in the Eurozone).

Gold also eliminates other risks. One is that no central bank has the power to devalue it. This means that the artificial and unnecessary risks of foreign exchange go away. A gram of gold is a gram whether in London, Frankfurt, New York, or Shanghai. International business is more predictable, and less expensive with no need to hedge currency exposure.

The gold standard empowers the savers with real choices, including the choice not to invest in debt; a choice paper money, printed to alleviate government spending, does not give us.

Keith Weiner is an economist, Forbes columnist and CEO of Monetary Metals

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