Return of Gold to an Active Role in the New, Global Monetary System
The questions gold investors have to ask themselves is, "if the days of the dollar are numbered, how will gold be used in the monetary system that follows? Will there be a global monetary system that all nations subscribe to or will the monetary world fragment?" For one thing, we will continue to live in a global world with nations trading amongst each other. To gold investors, such an eventuality -let alone its potential reality--would cause a return to the use of gold as a foundation for any monetary system, but not as a means of exchange, ever again. That journey has already started. Whether in a cooperative or uncooperative world, gold will have to provide international liquidity and facilitate trade between nations in place of the dollar. This will include the U.S. too. The world is headed irrevocably to a multi-currency system with the dollar as one of the world's leading currencies, but not the sole one. Gold, as always, will have to inspire the trust it once did. It will have to fill the gap left by the world of currencies that occurred when the developed world removed itself from gold and at the same time removed currencies from supplying adequate measures of value.
It is appropriate to look at whether we will see the likes of the Gold Standard again.
A Word on the Gold Standard
Mr Ben Bernanke has given a series of lectures on the Gold Standard and its performance. What he said about it was quite correct. What he said was a critique of the Gold Standard with a view to dismissing it. It's a pity he did not address the question of gold's future as a contingency plan, which we are sure has been discussed thoroughly by the Fed and with the input from the other developed world central bankers. After all, when Alan Greenspan said the "Gold is money, in extremis" he was right then and in the future. Few people would deny we have moved into extreme times for most nations. A fact that we have seen a glimpse of (central banks and the Bank of International Settlements are quiet on these points) has been that in the last two year gold has been used amongst banks and nations to facilitate loans and to lower their interest costs.
So much has been written about the failings of the Gold Standard, but what has been omitted when a comparison to today is made, is that the gold system was designed for its time and it succeeded very well in that context, with that stability and those values. Then those values changed, the situation governing money changed and this frozen, fixed system did prove inadequate for the days that followed. What is missed from the criticism of that system is that it was a system that used gold as the foundation for the system of money of that day.
It wasn't gold that was at fault, it was the system that used the gold.
Measure of Value
Today, gold has done what it did then. It has proved to be a measure of value, a counter to the swings in the value of currencies. In the days of the gold standard, the notes issued against gold were based on the value of gold which was fixed. In essence, the devaluation of gold in 1935 was an instrument to expand the amount or supply of money. Prior to that and a basic cause of the depression was an insufficient money supply. The devaluation of the dollar assisted in the U.S. recovery at the time. The subsequent gathering of gold into U.S. vaults gave financial credibility to the U.S. monetary system.
Why and how was he correct? He discussed the system called the Gold Standard with its fixed exchange rates and fixed price of gold. This can no longer happen for the reasons he gave. Today, we have neither. Going back to a fixed price of gold or, more importantly, to fixed exchange rates would be insane. The current misfortunes of the Eurozone are amply demonstrating this as rich countries and poor countries use the 'fixed' exchange rate of the euro between themselves. We will see this decade old experiment founder for the same reasons eventually after a long and painful process that could last another decade
The questions gold investors have to ask themselves is, "if the days of the dollar are numbered, how will gold be used in the monetary system that follows? Will there be a global monetary system that all nations subscribe to or will the monetary world fragment?" For one thing, we will continue to live in a global world with nations trading amongst each other. To gold investors, such an eventuality -let alone its potential reality--would cause a return to the use of gold as a foundation for any monetary system, but not as a means of exchange, ever again. That journey has already started. Whether in a cooperative or uncooperative world, gold will have to provide international liquidity and facilitate trade between nations in place of the dollar. This will include the U.S. too. The world is headed irrevocably to a multi-currency system with the dollar as one of the world's leading currencies, but not the sole one. Gold, as always, will have to inspire the trust it once did. It will have to fill the gap left by the world of currencies that occurred when the developed world removed itself from gold and at the same time removed currencies from supplying adequate measures of value.
It is appropriate to look at whether we will see the likes of the Gold Standard again.
A Word on the Gold Standard
Mr Ben Bernanke has given a series of lectures on the Gold Standard and its performance. What he said about it was quite correct. What he said was a critique of the Gold Standard with a view to dismissing it. It's a pity he did not address the question of gold's future as a contingency plan, which we are sure has been discussed thoroughly by the Fed and with the input from the other developed world central bankers. After all, when Alan Greenspan said the "Gold is money, in extremis" he was right then and in the future. Few people would deny we have moved into extreme times for most nations. A fact that we have seen a glimpse of (central banks and the Bank of International Settlements are quiet on these points) has been that in the last two year gold has been used amongst banks and nations to facilitate loans and to lower their interest costs.
So much has been written about the failings of the Gold Standard, but what has been omitted when a comparison to today is made, is that the gold system was designed for its time and it succeeded very well in that context, with that stability and those values. Then those values changed, the situation governing money changed and this frozen, fixed system did prove inadequate for the days that followed. What is missed from the criticism of that system is that it was a system that used gold as the foundation for the system of money of that day.
It wasn't gold that was at fault, it was the system that used the gold.
Measure of Value
Today, gold has done what it did then. It has proved to be a measure of value, a counter to the swings in the value of currencies. In the days of the gold standard, the notes issued against gold were based on the value of gold which was fixed. In essence, the devaluation of gold in 1935 was an instrument to expand the amount or supply of money. Prior to that and a basic cause of the depression was an insufficient money supply. The devaluation of the dollar assisted in the U.S. recovery at the time. The subsequent gathering of gold into U.S. vaults gave financial credibility to the U.S. monetary system.
Why and how was he correct? He discussed the system called the Gold Standard with its fixed exchange rates and fixed price of gold. This can no longer happen for the reasons he gave. Today, we have neither. Going back to a fixed price of gold or, more importantly, to fixed exchange rates would be insane. The current misfortunes of the Eurozone are amply demonstrating this as rich countries and poor countries use the 'fixed' exchange rate of the euro between themselves. We will see this decade old experiment founder for the same reasons eventually after a long and painful process that could last another decade