What Is the Purpose Of A Gold Standard? (Even its adherents have an imprecise understanding)

If you ask the typical academic Keynesian economist this question, he would probably say that there was no purpose at all. People used gold just because it is shiny and beguiling, and therefore attractive to superstitious, primitive people.

If you ask the typical gold standard advocate this question, he would probably respond with some vague platitudes like "gold is honest money," or perhaps would argue that a gold standard prevents government debt issuance, or some such thing. They have, I would say, only an imprecise grasp of the purpose of a gold standard system.

And what of the typical lay person, with an interest in these matters? From one side she hears that there is no purpose at all, and from the other side she hears a somewhat disjointed collection of vagaries, which gives rise to the thought that perhaps the first side has a point.

A gold standard system has a very specific purpose. If you don't understand the purpose, then of course it wouldn't seem to make much sense. If you didn't know that the purpose of an airplane was air travel, then you might think it was a rather badly designed movie theater.

Now we can say what a gold standard does not do: It does not prevent panics, crashes, depressions and so forth, caused by various factors unrelated to currency value. It does not prevent government debt issuance--historically, governments favored gold standard systems because they make issuing debt easier--although it does prevent printing-press finance of government expenditures.

Some IMHO food for thought...

There is only about $7.2 trillion in gold in the world, which, of course, the U.S. gov’t does not and can not own,as over half of that is jewelry.

U.S dollars held by central banks of other nations is $9 trillion.

There is about another $1.5 trillion in U.S. dollars between demand deposits (checking accounts, etc.) and paper currency worldwide.

To “back” U.S. dollars with gold we’re a few trillion short in how much gold the government owns at $1,500 per troy ounce.

Not to mention, if U.S. dollars were backed by gold, China could demand payment of the roughly $3 trillion in U.S. dollars that it’s central bank has in it’s reserves.

Backing U.S. dollars with gold would necessitate an enormous increase in the value of gold, which is the real purpose of a drive to back U.S. dollars with gold.

The value of the U.S. dollar would soar if we dramatically cut imports of manufactured goods, which would create a lot more jobs in the U.S., and imported only raw materials.

The U.S. balance of payments would shift to a net inflow of U.S. dollars, which would make them once again enormously valuable to those outside of the U.S. This would, of course, cause the U.S. dollar-denominated price of crude oil to dramatically drop.

Gold would still, of course, remain an excellent long-term investment.

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