Is a Return to the Gold Standard Imminent?

Is a Return to the Gold Standard Imminent?

May 8, 2019

Ongoing changes to monetary policy governance are leading some to speculate that President Donald Trump is leading the United States toward a return to the gold standard. With two open seats on the Federal Reserve Board of Governors—to which he has attempted to appoint Herman Cain and Stephen Moore—President Trump has the opportunity to make a long-term, lasting impact on the nation’s monetary policy.

Additionally, the adoption of Basel III, a new voluntary regulatory framework for banks, is allowing banks to purchase gold with limited risk. Basel III imposed more stringent capital requirements for financial institutions. All of these signs point to a potential return to the gold standard in the very near future. This means that now is potentially one of the most strategic times for savvy investors to begin gold investing.

The gold standard is a currency model wherein the paper currency is backed by gold reserves held by the central bank. The United States currently operates a fiat currency, which means that the currency is only as valuable as the central bank backing it says it is.

The U.S. first established a gold standard in 1861; it abandoned the system in 1933. In 1977, the last remnants of the gold standard system were completely abolished.

Under a return to the gold standard, every U.S. dollar would be backed by an amount of gold held by the Federal Reserve. There are a number of benefits associated with a return to the gold standard, including the following:

  • Fixed assets: One of the primary benefits of the gold standard is that it links paper money to a solid, fixed asset—namely, gold held in reserve. This essentially self-regulates the market, preventing out-of-control inflation from occurring and discouraging unsustainable lending.
  • Discourages inflation: Under a true gold standard currency, there can only be as much paper money as there is gold in reserve. This means that it’s virtually impossible for a currency to artificially inflate. In turn, the currency as a whole is more stable and less prone to collapse compared to fiat currencies.
  • Prevents expenditure overruns: With a gold standard in place, government budgets and expenditures can’t exceed the value of the gold that’s in reserve, meaning that a gold standard currency can drastically reduce expenditure overruns. A gold standard can lead to more responsible governance.
  • Promotes productivity: More productive economies are rewarded under a global gold currency system, because gold is often traded directly for goods and services. This means that governments have a direct responsibility to foster and sustain economic growth under a gold currency system.

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- by Steve Hunt

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