Why America Needs a Modern Gold Standard

Paul Volcker, while not advocating a modern gold standard, said recently that what has happened since the destruction of the Bretton Woods gold exchange standard in the early ‘70s has become an unacceptable situation. He pointed out we’ve had more banking crises, more economic crises, more currency crises, and some of a very severe nature, as we’ve seen.

So when a figure of stature like Paul Volcker says, we’ve got to look to do something, I think what it leads to is a vigorous debate. And we had a gold standard for 180 years, why can’t we move to a modern gold standard? Well, it did this, it did that, it caused ebola…it causes arthritis. I mean, they blame gold for everything.

But once you get a real discussion going, you begin to look. Okay, what is the truth? Where was it working, and where may have been the flaws? And so you try to come up with a modern gold standard.

We discuss a gold price system in our book, Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It. There are various ways to do this, but you fix a price to gold. Let’s call it $1,200.00 an ounce, for argument’s sake. All it would mean is, above $1,200, you would tighten up on the creation of reserves; it goes below $1,200, you would ease up. And so it’s like cruise control; just keeps it steady.

And as backups, as safeguards, you do two things. One is you move all the legal impediments to alternative currencies. So if you felt the government was going off the rails, you could do something directly, which is much easier to do today than in times past.

The other thing you do in the modern gold standard, which the classicists would like, is have convertibility. In other words, at $1,200.00 an ounce, you could take your dollars – you’d pay commission, but you could take your dollars to the government and receive gold in return.

And so you don’t have to have a 20 or 10 percent gold cover, you just say the government must maintain, subject to audit, 50 million ounces, or 100 million ounces – we have 261 million ounces today – all it would mean is that the government would have to keep a certain amount of gold on hand. So if it started to run low, it would have to go out in the marketplace. If it started inflating, it would start losing money, but you’d have the convertibility.

So convertibility, and removing the legal impediments on alternative currencies, would make a modern gold standard work. And again, it’s very simple. Gold is a ruler. The British showed you don’t need much gold to affect a gold standard, if you know what you’re doing. They did it, as Nathan Lewis pointed out, before World War I. The Brits had about one and a half percent of the world’s supply of gold. I think it was about seven, eight million ounces or something. In the late 1940s, the U.S. had, at one point, almost seven hundred million ounces, almost half of the world’s gold supply. Yet, we didn’t know what we were doing, and we wrecked the system.

So it’s not the amount of gold you have, it’s do you know what you’re doing? Do you know what the system is for? And if you understand that, then you don’t have to have much gold to make a modern gold standard work. Knowledge is the key.

The Daily Reckoning