The gold standard has a long history from times immemorial, but in the past hundred years countries have been emboldened to move to fiat (printed) money, only to come to grief.

Today’s political leaders, bureaucrats, central bankers and economists think of the gold standard as some quaint ritual from the scrap-heap of discarded causes. Advocates of the gold standard are labelled as followers of some atavistic order.

Just before the start of the 20th Century, the gold standard was a subject of fierce debate in the Presidential elections in the US.

Americans from the South and the West believed that the gold standard had harmed their interest. Riding on the crest of this belief, William Jennings Bryan fought the 1896 elections as the Democratic candidate.

Bryan, in a surcharged speech, made his famous statement “You shall not press down upon the brow of labour the crown of thorns; you shall not crucify mankind upon a cross of gold”. In the upshot, Bryan lost the election of 1896, and in 1900 the Gold Standard Act returned the US to the gold standard. As a postscript, it is worth noting that Bryan lost the Presidential elections in 1900 and 1908.

After the First World War, many countries went off the gold standard which resulted in inflation and disrupted economic activity and ultimately led to the Great Depression and deflation. As Jaques Rueff says in his Monetary Sins of the West (1972), there was catastrophic suffering till 1934, when President Franklin Delano Roosevelt raised the price of gold from $20 to $35 per ounce; this was in effect a devaluation of the US dollar! Critics of Roosevelt warned about unbridled inflation and total chaos but, to the contrary, the economy recovered.

The Bretton Woods system, introduced in 1945, was some sort of a Gold Exchange Standard. The US committed to a $35 per ounce price and other countries pegged their exchange rate to the US dollar. This eventually broke down in August 1971 when President Nixon broke the US dollar-gold link.

Reserve currency system

What followed was 40 years of international monetary chaos. Despite this, international monetary pundits believe that international monetary exchange rate stability can be achieved by skilful co-ordinated action by the major countries.

Financial leaders the world over are arrogant enough to refuse to see the shambles in which the international monetary system finds itself today.

The reserve currency system, which has evolved, is the source of what Rueff called “deficits without tears” — to consume without producing which damages economies irrevocably. There is an imperative need to restore real integrity to the world’s monetary system.

The Royal Institute of International Affairs’ recent Task Force Report on the role of gold in the international monetary system, did not favour a major role for gold.

The major countries whose currencies are in the SDR basket would not support the introduction of gold in the SDR basket because it would increase these countries’ liabilities when they would be most reluctant to take on larger liabilities.

The cat comes out of the bag. The countries which have a major role in the working of the IMF are precisely those which have a predominant share of gold in their total reserves. Of the global reserves, a little less than 13 per cent are in gold.

In contrast, the major countries have a very high proportion of gold in their foreign exchange reserves: US (77 per cent), Germany (74 per cent) Italy (73 per cent), France (72 per cent), the Netherlands (62 per cent) and European Central Bank (35 per cent). When fiat country currencies perform badly, it will be the countries with large gold reserves which will gain.

Switching to gold

Countries which have accumulated large reserves in recent years are precisely those which have a very low proportion of gold in their reserves. In recent years, these countries have built up some gold reserves but it is unfortunate that they have not been more aggressive in switching to gold.

Nobel Prize Laureate Robert Mundell predicts that “Gold will be part of the structure of the international monetary system in the 21st Century”.

Steve Hanke says that the international monetary system is characterised as being a “chaotic non-system” and he raises the pertinent question of the feasibility of countries moving to gold-based currency boards. Hanke says that gold-based currency boards could transform Professor Mundell’s prediction into a reality ( Global Asia May 2012).

While the full restoration of a gold standard will take time, belated supporters of gold will progressively join the Gold Bandwagon.

What should the gold have-nots do and, in particular, what should India do? This deserves a separate dedicated examination.

Disclosure: This column draws heavily on the excellent work of the Lehman Institute and its publication ‘‘The Gold Standard Now’’ and the work of Ralph Benko of the American Principles Project, Washington DC. The present columnist is a member of the Gold Advisory Board of the American Principles Project.


Gold is all set to make a comeback in the global monetary system. Unfortunately, countries such as India, which have run up large reserves in recent years, have not been aggressive in switching to gold.


(This article was published in the Business Line print edition dated July 13, 2012)
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