Gold standards

In August 1971, President Richard Nixon ‘temporarily’ (his word) suspended the gold standard in the US. The US had been committed to backing every Dollar with gold; other currencies were pegged to the Dollar. The entire Western financial system was thus effectively yoked to gold via the Dollar. Nixon ended this. He ushered in 50 years of fiat currencies, backed only by confidence in the issuing governments and central banks. The system of fluctuating exchange rates we have today is one legacy. He closed the ‘gold window’ (meaning foreign governments could no longer exchange their Dollars for gold); he imposed a 90 day freeze on wages and prices (inflation was then almost 6%) and told a TV audience that we “must protect the position of the American dollar as a pillar of monetary stability around the world”.

That pillar is now under sustained attack from several directions. Freed from the constraints imposed by the gold standard, the US government has splurged, creating and distributing trillions in paper money, first via the invention of ‘Quantitative Easing’ to rescue banks post-2008 (and again recently) deemed ‘too big to fail’, and then next during the Covid-19 pandemic.

Opinion is sharply divided on whether Nixon’s removal of the last vestiges of the gold standard benefited the US and the world economy. One thing however is sure – thereafter governments and central banks were able to expand money supply without the bother of having anything to back it.

Now three US members of Congress have sponsored a Bill (2435) “to define the dollar as a fixed weight of gold”. If the Bill became law – which at this stage seems unlikely – then not only would the Dollar be pegged to a fixed weight of gold. It would also mandate the full disclosure of US government and Federal Reserve gold holdings and gold-related transactions for the past six decades. These holdings and transactions are opaque, to say the least.

The Bill claims in part that the expansion of the US money supply “has primarily enriched the owners of financial assets while it has endangered the jobs, wages, and savings of blue-collar workers”. It also points out that the Dollar has lost “more than 40% of its purchasing power since 200, and 97% of its purchasing power since the passage of the Federal Reserve Act in 1913”.

The Bill may gain some traction as a consequence of the resurgence of inflation and the extremely high US debt level, now fast approaching $32 trillion. The elimination of gold redeemability from the monetary system has freed central bankers and government officials from accountability when they expand the money supply, or fund government deficits though trillion-dollar bond purchases, or otherwise manipulate the economy.

The renewed interest in gold as currency is spreading in the US. Senators in Texas, a state that has long been in favour of cryptocurrencies, have introduced a Bill proposing the introduction of a state-wide digital currency that is 100% backed by gold – a ‘stablecoin’ in other words.

The debate over whether a gold standard could or should be re-introduced has been given fresh impetus not just by high inflation and towering debt levels in the US. Stimulus also comes from the official sector; the weaponization of the Dollar, the risk that offending the US can result in the freezing of Dollar-denominated assets, is encouraging countries to build up their gold reserves as a buffer against unknown adversity.

Politicians will continue tussling over a return to a gold standard. Turning back the clock may be impossible at a national level. But a personal gold ‘standard’, a buffer against adversity, is now available to individuals thanks to the creation of Glint. Glint enables clients to buy, spend, and save in gold.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.