Hard Money = Hard Times

Gold fever leaves a headache.

  Returning to the gold standard may sound like a good idea, but its only real historical value has been in international trade, fixing currency values in terms of gold so traders don't get shafted with worthless paper.   However, there is a limit to the available supply of gold in the world, and if nations peg their currencies to an agreed-upon gold price -- or the amount of gold in their vaults -- there can be major problems. Relying on gold as a standard of value can lead to wild gyrations in the prices of everything else. Unless, of course, governments agree to a specific value, in which case they and their central banks lose control over the supply of cash in circulation, and thereby lose influence on the economic health of the nation. If the money supply is limited, interest rates will rise and the economy in general will decline.
   Historically, the gold standard was "a major contributory cause of the two worst economic depressions in world history: the 1870s and the 1930s," according to economist Mark Blyth, writing in his book "Austerity: The History of a Dangerous Idea" (Oxford, 2013). Moreover, "The global supply of gold puts a ceiling on growth," he adds.

   There is a finite amount of gold available in the world, much of it in Fort Knox, Ky, and on deposit in the basement vault of the Federal Reserve Bank of New York. With a limited supply of gold, it follows that under a gold standard, there will be a limited supply of money in circulation. Therefore, central banks have no discretion or control over the money supply, and thus no influence over the economy.
   Money is the lifeblood of an economy, and if the amount of money available is tied to the amount of gold a nation possesses, the health of its economy is directly tied to gold. So lots of gold means a nation is wealthy -- but it also means higher prices. Minimal gold means a nation is poor, and many of its citizens go hungry.
   The gold standard is a remnant of mercantilist economic theory, which stipulates that whoever has the most gold wins. But when the conquistadors brought so much gold back to Spain in the 16th Century, the result was soaring inflation, as prices rose to absorb the amount of money (gold) available.

   America already has a great deal of gold. Fort Knox holds 147.3 million ounces of the stuff, according to the U.S. Treasury, and the New York Fed says it has some 6,700 tons in its vault. Not all of it belongs to the government, however. Much of it was deposited for safekeeping decades ago during periods of world torment. None of belongs to the Fed; it's all owned by the U.S. government, foreign governments, central banks and other international organizations. No individuals or private sector entities can deposit gold with the Fed.
   But even at its book value of $42.222 an ounce, that's a powerful lot of money. And calculated at the current market value of nearly $1,400 an ounce, the idea of converting all that gold into cash boggles the mind. You try doing the math.
   So going to the gold standard, whether using the book value or the market value, would play havoc with prices, living standards and economics worldwide.

   Returning to "hard money," then -- currency that is backed by the amount of gold a nation possesses -- would upset the entire system. Combining a return to the gold standard to an austerity program would lead to total economic disaster.
   Austere measures to reduce spending may work for a family, and even for a firm for a short time. But there are repercussions when tried on a larger scale. When a major firm or a government (local, state or national) reduces expenses by laying off workers, that only increases unemployment. With more people out of work, that reduces consumption, which in turn slows production and the economy as a whole declines.
   And some reductions, such as putting air traffic controllers on furlough, impose chaos on the general public.
   Those nations that have tried austerity have chosen "to suffer massive deflation, migration and unemployment," while they wait for the economy to recover, economist Blyth points out.
   "But we must ask," he adds, "if the candle was worth the game? The answer is no."

   Meanwhile, the austerity advocates and gold standard bearers assure us, the business cycle will turn up again and the economy will recover, and we'll all have pie in the sky when we die.

   We should live so long.