If you hang around enough economists you will eventually hear the term “gold standard” bantered about. You see, this was a time in American history when the dollar was stable and as a result every country revered it. But what was this gold standard that people keep referring to?
When America had its currency tied to a ratio of gold bullion the dollar was theoretically considered to be far more stable. A more stable currency could mean several things economically, namely the debt the American central bank issues could also be considered to be more stable and as a result the interest on it would be lower. The reasons why America was taken off of this gold standard are numerous and to be honest the growth of the American economy would far outstrip the value of the total amount of bullion mined in the world.
Many more countries other than the United States have had some sort of gold standard in their lifetime. England for instance when it was the trading power of the world used to tie its currency to the value of its gold bullion reserves. In the late 1800’s and early 1900’s it was common practice to use the amount of gold and silver reserves to secure the value of any country’s currency. Later on as world trade became prolific a more fluid or fiat currency was needed to keep pace with the growth of all the economies in the world.
Are there any significant benefits today to go back to a gold standard? Well, some countries seem poised to do just that so there must be some benefits to using gold reserves to back up a currency. India and China as individual countries seem to be amassing great wealth in terms of the amount of gold, silver, and other precious metals they are stockpiling. Clearly, these countries are foreseeing a time when using precious metals to secure a nation may become the International standard again.
The trouble with securing the United States dollar to the gold standard again is that it is estimated that the total amount of gold bullion in the world amounts to 520 billion dollars. Since the American economy is measured in the trillions of dollars you can see the disconnect here as there isn’t enough gold to match the economy. There would have been some sort of translation or exchange rate between the dollar and the amount of gold bullion the United States could amass in order to make this workable.
The issue that many countries have with maintaining a gold standard is that gold or other precious metals are difficult to store for large periods of time. These large masses of precious metals actually become a security risk as it would take only few individuals with enough firepower and will to cause significant harm to the vault where this currency is stored.
Simply put in the age of the computer with electronic transmissions taking microseconds to occur around the world it would be foolhardy to store gold and other precious metals to secure a currency. The time to move this money around would be ages in comparison to how long it would take modern infrastructure to perform the same exchange today.
Unless something really starts to startle the world economies it may be a long time before we are back to the time when a gold standard is a common practice among nation states. Clearly, it may just take a worldwide currency collapse to cause such action in the world.