The unwelcome return of the Gold Standard

Imagine you were to pen a letter to the editor of any major newspaper predicting that the world’s major economies would be going back on a currency gold standard. Imagine, assuming the letter was published, the gales of laughter from the readers.

Editors don’t often publish my letters, and hence I switched to blogging. Here’s my opinion: the gold standard is coming back. For many reasons I would welcome such a return. However the circumstances in which the gold standard is likely to return are now not so favourable to Australians.

For younger readers, a gold standard means a nation’s currency is backed by reserves of gold held by the State. It is therefore a foolproof method of providing faith to the acceptors of that currency that it actually is worth what it says on the face of the note, the coin, the bill of exchange, the deposit etc.

Redeemable in gold on demand by the bearer

Additional currency could not be minted or printed unless additional gold was mined and stored in the vaults. There is a line in Kenneth Grahame’s “Wind in the Willows” that describes Toad’s incarceration: “The rusty key creaked in the lock, the great door clanged behind them; and Toad was a helpless prisoner in the remotest dungeon of the best guarded keep of the stoutest castle in all the length and breadth of Merry England.” Well, that also sums up how gold bullion is stored, or at least used to be stored, by our Government authorities.

I say ‘used to be’ because western Governments gave up adhering to a gold standard decades ago. Gold bullion stored in vaults, while still valuable on international markets, was less necessary for a Government freed of the shackles of currency legitimacy. If the currency is no longer required to be legitimate, went the whispers in Canberra, Whitehall, Washington and Harare, let’s print more of the stuff and meanwhile sell off the gold. Double whammy, to use a colloquial term. High fives, if you prefer, as I know some American readers would.

The gold standard was a constraint on Government spending. Hence Governments didn’t like it. However, ordinary people appreciated the standard. Between the early years of the 20th century and President Nixon’s term in the US as President, the global gold standard was dropped, restored, watered down and eventually abandoned in 1971. Nixon announced in the summer of that year that the US would no longer commit to redeeming US currency for gold. Just like that, the value of the currency was no longer something that represented real value, gold. It was now coin and paper that was only worth something if everyone went along with the pretense that it was worth something. That is called a fiat currency.

No, we won’t commit to redemption in gold anymore.

Fiat currencies are not new. I understand that China can show it had a fiat paper currency more than 2,000 years ago. It didn’t last, of course, fiat currencies never do.

But fiat currencies are brilliant for Governments and bankers for many years. Until they aren’t.

Enough of the recent history for now, let’s consider the future. I say the gold standard is on the way back. Not for one moment do I suggest that the US will voluntarily return to the gold standard. Nor will any European country, the EU, Australia, Japan or tinpot dictatorships like New Zealand or Canada. And therein lies the disconnect between a laughing reader of a letter to the ed from me and reality. The typical reader will say, correctly, that a return to the gold standard will not happen voluntarily because there will never be any political will for it to happen regardless of the party in power. However, that doesn’t mean it won’t be imposed by external circumstances.

Much like the recent SpaceX rocket explosion, described by the team at SpaceX as an unscheduled rapid disassembly, the Greenback, the Pound, Euro and the little Aussie battler, sometimes unfairly described as the South Pacific Peso, could go pop! Unforeseen (by some).

A number of countries have clear geopolitical goals, plenty of natural resources, don’t suffer fools gladly and consequently are not mired in self destructive actions based on climate change fantasy and wokeism. China, Iran, India, Brazil, Saudi Arabia and Russia have long resented that the US dollar is the world’s reserve currency. Oil, the most significant commodity, is priced in US dollars. US dollars are accepted everywhere. These other nations have spotted their chance and appear to be making progress towards a new effective economic alliance that will, if successful, create a rival and possible successor to the US dollar as the global reserve currency.

Further, China is now the world’s largest producer of gold bullion. Guess where it is going? Into well guarded keeps in stout castles in secret locations in China. China and its friends have the natural resources, the economic strength, rising stores of gold and the political will to create a new dynamic based on a gold backed petroyuan. Even if a gold standard is not normally advocated in government circles, an eastern led return to a gold standard could be used as an opportunity to kick the US while it defenestrates itself. Having given up on properly protecting the dollar, having given up its own energy independence, the US would be dependent on buying energy in a foreign currency that would be increasingly expensive in US dollar terms. China may feel that voluntarily returning itself to a gold standard could deal a devastating blow to the US. And to the rest of us in the remnants of the Anglosphere.

I don’t know if this will happen, but I feel as if it is likely to. The self destruction of the West has certainly accelerated in the last three years and it is hard to see an internal restoration of sense or sensibility. An external shock will probably be required. These external shocks come along every now and then in history. How each nation responds determines, usually, the outcome.

As to the broader consequences, that will have to wait for a future post.

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