The International Gold Standard vs. the International Dollar Standard
We usually speak of the era of the international gold standard as beginning at the end of the Napoleonic Wars in 1815 until the suspension of gold by European nations in the second half of 1914, in response to World War I. But this is legally incorrect.
Great Britain did not formally establish a full gold standard until 1844. Germany waited until after the war with France in 1871. The United States did not establish it until 1879. Prior to this, a government system of price controls known as bimetallism prevailed. Either gold coins or silver coins circulated, whichever was artificially overvalued by the particular national government.
The United States had a pure fiat money system during the Civil War: the greenbacks. So did the Confederacy. It took from 1865 to 1879 to establish full gold convertibility.
The international gold standard operated from 1879 until 1914. That is a grand total of 35 years. The dollar standard has operated from September 1, 1939, when World War II began, until today. That is a total of 74 years -- over twice as long as the international gold standard.
With respect to the general public, the abandonment of gold in 1914 in Europe, and in 1933 in the United States, caused no organized protests. The various national governments got away with this undamaged politically in the war years. The public did not care. Citizens had used gold coins regularly for only 35 years in Europe. Franklin Roosevelt could do whatever he wanted, other than pack the Supreme Court. The public did not protest his unilateral abandonment of gold in 1933.
Today, there is essentially no understanding of the full gold coin standard. There is no major economist in the last 70 years who has recommended it. Mark Skousen's book, Economics of a Pure Gold Standard, his Ph.D. dissertation, is unknown to the economics profession after a generation. It is safe to say that there is no political or professional constituency in favor of a full gold coin standard.
In contrast, the whole Western world, plus Japan, is content with the dollar standard. The central banks in 2007 held IOUs issued by the U.S. Treasury for well over 60% of their holdings of foreign exchange. This was up from 59% in 1995. It was down from 2001: 71%.
So, any talk about the U.S. dollar's losing its status as the world's reserve currency flies in the face of the evidence.
If you think the Federal Reserve is nuts, think of the Chinese Communists who tell the People's Bank of China what to do. The yuan is a phony currency. The Chinese economy is a bubble. How big a bubble? Huge.
Here's where the addiction shows: According to the BBCs Robert Peston, "China has built a new skyscraper every five days, more than 30 airports, metros in 25 cities, the three longest bridges in the world, more than 6,000 miles of high speed railway lines, 26,000 miles of motorway, and both commercial and residential property developments on a mind-boggling scale". All in just the past five years.While debt rose at a very rapid clip of 15% of GDP every year(!), to go from 125% to 200% of GDP in those same five years. Peston is ever so right when he says: "when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return". Like the west, China has tried to buy growth, and borrowed to pay for it. In doing so, it went way beyond what Bernanke and Draghi would have even dared to dream of, ignored all economies of scale and ran headfirst into a giant diminishing returns sinkhole.
Analyst Charlene Chu: "In 2008, the Chinese banking sector was roughly $10 trillion in size. Right now it's in the order of $24 to $25 trillion. That incremental increase of $14 to $15 trillion is the equivalent of the entire size of the US commercial banking sector, which took more than a century to build.
Governments want to subsidize the export of goods. This is good for re-election. The USA is the largest consumer of imported goods on earth. So, governments instruct their central banks to hold down the domestic currency's exchange rate with the dollar. The bankers do this by creating new money, and then exchanging it for dollars. They then buy IOUs from the Treasury.
This is not an argument against gold. China's central bank accumulates gold. So does Russia's. They both mine gold, and they do not export it. Their central banks buy it. But China's central bank is the largest holder of IOUs from the Treasury.
Do not be deceived by gold bugs who argue that the restoration of a gold standard is just around the corner. It has not been around the corner since 1914.
The world has lived with the dollar standard far longer than it has lived with a gold standard. People are content with this. Then there is this question: What asset could be substituted? Virtually all economists, central bankers, and politicians agree: not gold. They have history on their side.
We are going to live with the dollar standard for international trade for a few more decades. The switch to gold is unlikely. This idea has no constituency outside of a few Austrian School websites. None of these offers a plan.
Central bankers run the show. It will take an international disaster to change this -- a disaster that the voters recognize as caused by central bankers. We know who will deny this: 99% of all economists. That is formidable opposition. The man in the street defers to the government, and the politicians defer to the central bankers.
Ron Paul could not get the votes to audit the Federal Reserve. He did not bother to introduce legislation to repeal the Federal Reserve Act of 1913. Yet that is what must be done.
We will continue to live with the dollar standard for a few more decades. Plan accordingly.