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What is the gold standard monetary system?

Put simply, the gold standard monetary system is when a country’s monetary system is, well, tied to the value of gold. What this does is create a set price for gold and sets their monetary system’s value accordingly. For example, gold at $300 would see $1 dollar being 1/300th of said value.

As of now, no countries utilize the gold standard. This change started with the Bretton Woods Agreement, which came into place shortly after World War II. This agreement made it so that the United States dollar was the central currency for all others to base their value on. That dollar was then worth $35 an ounce. In a way, this made the gold standard more of a global one, at least for the time being.

However, during the rebuilding after World War II, the United States spent millions to assist other countries. Gold was slowly disappearing, and with that, the dollar was depreciating in value. Eventually, the United States was losing tons of money with no end in sight. Other countries were hesitant to support the unpredictable economy and instead converted their funds to physical gold as a result.

This decision, of course, put the US in an even worse place. It was then that President Richard Nixon ended in the gold standard in 1971. While the world still mostly set its value based on the United States dollar, there was no longer that tie to gold. When this happened, the value of gold went up to $124.

Why Use the Gold Standard Monetary System?

Many were proponents of such a system for various reasons. For one, statistics prove unemployment rates were lower, and people were making steadier incomes during this time. This standard also prevented the government from printing endless amounts of money, limiting artificial inflation rates at that.

Not only this, but it prevented the government from pushing the country further into debt. Considering there were only so many funds to go around, those in power would be much more careful with how it’s spent.

However, there were major issues abound even before World War II. For one, anytime governments would try to protect their gold through artificial methods, the economy would become unpredictable. That and countries without gold could not compete with countries that had gold mining. Even the United States was behind in that respect. We had some gold mining, but nowhere near the largest methods.

This also meant the dollar was not boosted by thriving businesses and hard workers. That had little to do with anything. Instead, it was about how much gold could be brought in through mining and imports. Instead, governments focus on hoarding gold rather than trying to improve their economy in other ways.

Could we Go Back to the Gold Standard Monetary System?

Heading back to the gold standard monetary system would be difficult for the American economy. The government would have a hard time transitioning from the ability to print endless money to having that all limited. Corporations couldn’t see funding from the government, or at least they’d see a limited amount. If a pandemic were to hit during a gold-backed economy, bailouts would be few and far between.

The country is already in extreme debt. Tying the dollar to gold would make paying that off more difficult. This is because the government hasn’t focused exclusively on holding gold. Sure, they have their stores, but it wouldn’t be enough for the current economy.

This isn’t to mention that tying gold back to the dollar could ruin that asset as an investment class. Right now, many investors use gold as a hedge for the economy. The point is to keep their money outside of the fluctuating dollar. While there is silver and other assets to do so, gold has long been the standard hedge.

Finally, the gold standard would make the United States alone in its economic backing. As of now, countries all around the world communicate to ensure some semblance of value between their currencies. The US completely upheaving its current state would ruin all of that progress.

Conclusion

As of now, it doesn’t appear to be a good idea to head back to the gold standard monetary system. There are too many unknown variables in place. Who knows what the world will be like in the future, but it’s likely to keep moving away from this standard.