In recent years, there has been a lot of talk about different forms of exchange. The conversation has been sparked by the huge number of people getting involved in cryptocurrencies, many of whom have ended up learning about fiat currencies and how they work as a consequence.
Many of these crypto connoisseurs eventually become very critical of traditional fiat currencies like the dollar, pound, and euro, criticising their deflationary effect over the long run. To counter this phenomenon, the Bitcoin bulls and Ethereum enthusiasts often argue that our economies should transition from fiat to their cryptocurrencies.
The argument might seem new, but it’s not – far from it. Swap out “Bitcoin” for “gold” and this exact same argument has been made for decades. Much of the giddiness about gold stems from its role in the ‘gold standard’ monetary system, whereby a country’s currency could be converted to a defined quantity of the precious metal. It’s not the only shiny substance that’s been used this way; many other metals have, too, especially silver, but the gold standard is the one everyone references.
Gold’s fixed convertibility was ended for the last time in 1971 when the US unilaterally withdrew from the Bretton Woods system, creating the paradigm that endures today, 52 years hence.
While it’s not used in a monetary system, gold is still used for a whole host of things today. There are people, businesses, and countries that buy and store gold as part of their overall investment strategy, using it as a hedge against inflation and currency exchange fluctuation. It’s also used to make jewellery, electronics, art, and other industrial objects. With so much of it floating around our economies, trading gold through services like Equiti is also very popular as it is one of the most recognised and understood commodities.
Much of the bullishness about Bitcoin and other cryptocurrencies has declined in the last couple of years, leaving those who long for a return to the gold standard as the people pushing for an end to the fiat status quo.
But would the gold standard make sense? Its proponents seem convinced, but let’s examine it.
The Arguments for the Gold Standard
The gold standard’s supporters argue that the shiny substance self-regulates owing to its ability to retain value, thus reducing the risk of economic crises and recessions, preventing money printing from causing runaway inflation, and even reducing the trade deficit in the US.
Essentially, gold would take away some economic controls from governments and enforce more frugality and fiscal responsibility.
There are, of course, exceptions to this, but most of the proponents of the return to the gold standard today were not old enough to have lived through it or at least have been cognizant enough to understand it.
As a result, many of their key arguments fall down quite quickly because they ignore historical facts. For example, the gold standard that is supposed to prevent economic crises and recessions was at its height during the Great Depression and even contributed to its severity.
Partly, the reason an economic crisis during the gold standard’s reign could get so out of hand was that central banks had fewer tools in their arsenal. It was, therefore, this economic crash in the 1920s that got the ball rolling on the secession of the gold standard.
Additionally, while it is correct that inflation would be all but eradicated under the gold standard, deflation would offset this, creating economic contractions anyway.
The gold standard may solve some of today’s economic problems, but it would bring with it a bunch of new ones. It isn’t the magic bullet that many claim it to be, which is why many of today’s most prominent economists oppose such a move.