What should we think about the gold standard?

Will we return to a system of gold-backed money? I don't know. But unlike many of the "expert" pundits, I know that I don't know

A return to gold-backed money? Who knows?
Douglas Carswell MP
On 31 August 2012 08:10

What do you think about the gold standard? Was it a system for fixing the value of currencies, which helped plunge the world into the Great Depression? Or was it a currency system that prevented anyone from fixing currencies, helping the growth of international trade and prosperity?

I would say it was both. There were two gold standards: the pre-1914 system – or the classic gold standard – and the post-First World War system.

The later gold standard was, rather like the Euro today, a straitjacket system of currency price fixing. Far from facilitating the market, it tried to buck it. And perhaps like the Euro, the market ultimately bucked it.

But the pre-1914 gold standard was a very different beast. It meant not just that central banks paid one another in gold. Crucially, it meant that a private individual was able to exchange their paper money for gold.

This ability to convert paper money into gold – which I would argue was the key to the whole system – never came back after the war. To talk about there having been a "return" to the gold standard is, therefore, misleading. We returned to a system where governments fixed the exchange rate.

The classical gold standard was perhaps the antithesis of a fixed exchange rate system. Indeed it removed the power to control and manipulate money from governments.

While Britain infamously came off gold in 1931, in many respects we have only had a fully fiat, or paper only, currency since 1971. Until then, Sterling tended to be linked to the US dollar, which tended to be pegged to gold.

Thus while we never returned to the classic gold standard as it existed pre-1914, in some ways we stayed linked to gold until forty years ago.

Could we ever return to the gold standard? At this point, right thinking people are supposed to scoff. The very idea!

But I suppose smart folk would have scoffed in 1913, if you said we were about to abandon the gold standard. Nothing is ever permanent. Especially not money.

History is littered with paper currencies – which is the whole point. Sooner or later, paper money becomes history.

Will we return to a system of gold-backed money? I don't know. But unlike many of the "expert" pundits, I know that I don't know.

What I do know is that in the digital age we will have far more scope for currency competition. People will be able to escape from the tyranny of monopoly money regimes. Currencies will evolve organically, and that may mean commodity-backed currencies, as well as national and private currencies.

This will mean all kinds of accident and innovation. Which is, if you think about it, how the world once developed a system called the gold standard.

Douglas Carswell is the Member of Parliament for Clacton. He tweets at @DouglasCarswell. This post was used with permission and originally appeared at TalkCarswell.com

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