Will the Gold Standard Return?

Sunday, 19 August 2012
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Published in From The CEO

Paul Ryan, Mitt Romney’s choice for his Vice Presidential running mate, holds some very strong opinions.  For starters, he wants to limit the powers of The Federal Reserve, especially its ability to print paper money at will. 

The current mandate for The Fed is to monitor unemployment and inflation.  If Representative Ryan has his way, The Fed’s official attention will be restricted to inflation. Undoubtedly we’ll be hearing more from him on this issue during the next three months.

It’s not appropriate here in the Investor’s Corner to jump into a political harangue.  But we would like to point out that, if passed, legislation to rein in The Fed could hold significant consequences for the gold.  The Fed’s carte blanche to print paper currency would be outlawed under any bill introduced by Congressman Ryan.  But it’s the Vice Presidential hopeful’s second proposal before Congress that more directly concerns us:  the restoral of the gold standard in America.

The argument for restoring the gold standard provides us with a good opportunity to do a very quick historical review.  The gold standard represented an agreement by countries to tie their respective currencies to a specific amount of gold.  England had been the first to establish a gold standard through, of all people, the great physicist, Sir Isaac Newton, in 1717.  America, as a matter of day-to-day practice, switched to a gold standard in 1834, and formalized the arrangement with the Gold Standard Act in 1900.  And during the years from 1880 to 1914 – the so-called “classical gold standard – most nations followed suit.

The gold standard fell apart with the onset of World War I since most of its participants made the decision to print paper money to finance their war effort.  The German mark during this period became worthless.  A dramatic case in point was the story of one German citizen who rolled a wheel barrow loaded with marks to a nearby grocery store to buy a loaf of bread.  When he stepped away from the wheel barrow for a moment to find out whether the store was open, he returned to find his wheelbarrow gone and all his paper currency lying on the ground.

Anyway, America’s own gold standard was restored as the Gold Exchange Standard from 1925 to 1931.  Under this act, countries were able to hold gold or dollars or pounds as reserves.  But the United States was required to restrict its reserves to gold.  In 1931 this changed when Britain abandoned its gold standard.  President Roosevelt followed up in 1933 by compelling private US citizens through executive order to sell any gold holdings to the United States and declared the hoarding of the yellow metal illegal.  Under the new arrangement, the dollar became the reserve currency of the United States, and the country operated from 1944 through 1971 under The Bretton Woods system.

In August 15th, 1971, President Richard delivered the death knell to the gold standard in the US by announcing that the country would no longer redeem its currency in gold.  Now the price of gold was free to “float;” and here we sit today at $1,621 per ounce, my friends, waiting for the Fed to launch Q3.
Oh by the way, if you’re looking for Congressman Ryan to be successful in his effort to restore the gold standard, don’t hold your breath.  A dramatic increase in the price of your gold you upon announcement of Q3 seems like a much better bet.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.