Gold coins are often offered for sale on television to collectors, speculators, and to those who may want them “just in case.” But what if they were to become the coin of the realm again? Is that just a quaint idea, a remnant of some “golden age?” Why are people even talking about a return to the gold standard?
Measured against gold, the US dollar has lost more than 90% of its value since 1971, when President Nixon abandoned the gold standard. Although gold coins were long out of circulation before 1971 (Franklin Roosevelt nationalized all gold holdings in 1933), there was a troubled dollar-gold standard from 1944 to 1971. An agreement in 1944 at Bretton Woods established the US dollar as the world’s reserve currency. Although the dollar was backed by gold, other currencies were pegged to the dollar because of its reserve currency status. Reserve currency status may bring some privileges, like being able to borrow temporarily beyond normally accepted limits, but it clearly brought some challenges.
With the dollar as the world’s reserve currency, combined with the United States’ interest in promoting free trade after World War II, many countries deliberately undervalued their currencies to promote export economies at the expense of American manufacturing. While promoting the industrialization of the developing world is a worthy cause, much of the success of globalization came at the cost of American business and labor. The “privilege” of having a reserve currency eventually becomes a curse as dollar reserves accumulate in central banks around the world from the issuance of debt to finance ever rising budget and balance of payments deficits.
Lewis E. Lehrman, a scholar and investor, has been studying this issue for some time and believes that if the United States stays on the current path of monetizing deficits, it will follow the post World War II reserve currency decline of the British pound to eventual economic collapse. Lehrman, who co-authoredMoney and the Coming World Order(1976) with MIT economist Charles Kindleberger, was appointed by Ronald Reagan in 1981 to the United States Gold Commission. He is currently serving on the advisory board of the American Principles Project’s Gold Standard 2012 initiative. Lehrman believes that a return to the gold standard, whereby all balance of payment accounts are settled in gold, will provide a platform for stable currencies, increased investment, innovation, and improving opportunities for both skilled and unskilled labor.
Why gold? Gold is durable, malleable, and portable. It has endured over other perishable alternatives (grains, tobacco…), which do not have similar characteristics. Interestingly, the current money stock of gold is between five and six billion ounces, the equivalent of one ounce per person, similar to what it has been over time. The fact that it has grown in proportion with the population and output is a happy coincidence and provided for a stable monetary foundation of the Industrial Revolution. Lehrman refers to it as “the least imperfect monetary standard for market exchange, stable long run growth, and a stable price level.”
In his recent book,The True Gold Standard(2011), Lewis Lehrman outlines the steps to make gold the new global reserve currency. He recommends a Monetary Reform Plan that would take no more than four years to implement. The United States would announce resumption of convertibility on a date certain, allowing Congress to establish a process to determine the statutory gold value of the dollar. Shortly after announcing the Monetary Reform Plan, the United States should propose an International Monetary Conference. The goal would be to forge a mechanism for converting national currencies to gold on an unrestricted basis by a specific date. Anticipating that reaching such an agreement, even with a few significant trading partners might not be easy or timely, the United States could (and should) go it alone. By doing so, it would be able to draw up the terms by which other nations could become signatories to the Monetary Reform Plan. Expect to hear more about returning to the gold standard.