Saturday, February 07, 2009

A lot of the current problems facing the U.S. economy could be traced back to Nixon abandoning the gold standard

But not in the way that people usually think. I'm just an armchair observer of these things but here are my ideas: in the wake of World War II two institutions and one comprehensive treaty were created. These would be the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade or GATT. Originally all these things were purposed for helping international development, preventing another depression, and providing general rules about trade so that trade wars would be less likely to break out. The last served capitalism, of course, and would later be turned into the WTO, but at the beginning it contained enough flexibility that countries could engage in limited socialist activities while still being in compliance. Stability was paramount. They didn't want the world financial system to be able to run out of control.

One of the methods that they used to try and do this was the gold standard. By international agreement countries were required to have a certain amount of gold held somewhere that would back up the value of their currency. This was not a one to one correspondence but a situation where the gold was held as something like collateral for the currency. Reportedly, most of the gold was stored in the U.S. with different markers signifying who owned it.

There isn't really any intrinsic quality of gold that makes it valuable. It's shiny, it's nice, you can make great jewelry from it, and it's relatively rare, and needs processing. It's a kind of place holder, something that's been commonly agreed on as a stable standard, where no gold rush is foreseen that will drastically change the price. When used to back up currency it functions as a brake on bubble producing activity since more money printed would require more gold to be bought and held. In this way it anchors the value of currency to something stable, so that it can't erratically float up and down. There can in fact be changes where the amount of gold is added to and the amount of gold is reduced, but they have to be deliberate decisions, not automatic ones.

Nixon freed the requirement that U.S. currency be backed up with gold, thereby allowing the dollar to float and to fluctuate in value according to both general estimates of productivity and the workings of international markets. Uncontrolled currencies lead to unstable financial situations where speculation goes on top of speculation and the desire for short term gains without any thought of the future becomes a controlling force. When the foundation of this house of cards is shaken it all comes tumbling down, like it did in the U.S.

The Gold Standard, as a convenient way of managing the overall health of the economy on a very broad level, has given way to unregulated chaos. We need a return to regulation and a return to the management of the economy somehow.

As for personal reserves of gold, they won't do you much good because the things that matter are government decisions taken on a country wide level and not whether or not you have some gold stashed away.

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